9 Soc.sec.rep.ser. 373, Medicare&medicaid Gu 34,670arvin J. Klein, M.d., and Alvarado Internal Medical Group,inc., Plaintiffs-appellants, v. Margaret M. Heckler,* Secretary of Health Andhuman Services, Defendant-appellee, 761 F.2d 1304 (9th Cir. 1985)

Arvin Klein, a medical doctor, and the Alvarado Internal Medical Group, Inc., of which Klein is an officer, appeal the district court's dismissal of their action for judicial review of a decision of the Secretary of Health and Human Services. Appellants sought review of a determination that they owed the Government some $27,000 because they had fraudulently overstated claims to reimbursement for services rendered under Part B of the Medicare program. The district court granted the Secretary's motion to dismiss for failure to exhaust administrative remedies. We note jurisdiction under 28 U.S.C. § 1291 (1982), and reverse.

FACTS

Appellant Klein operates a diagnostic laboratory, the Alvarado Internal Medical Group, Inc. Klein and the laboratory perform services for individuals enrolled in Part B of the Medicare program.¹  42 U.S.C. §§ 1395j-1395x (1982). In the early 1970's, appellants qualified as medical providers under Part B and for several years submitted claims to various private insurance carriers for reimbursement for medical services provided to Klein's patients and to users of the laboratory services. Apparently, because Klein received payment for the bills submitted, the insurance carriers approved these bills as reasonable and the medical services as necessary. See 42 U.S.C. § 1395u; United States v. Erika, 456 U.S. 201, 203, 102 S. Ct. 1650, 1652, 72 L. Ed. 2d 12 (1982).

On July 14, 1976, the Secretary of Health and Human Services, acting through local Part B insurance carriers, initiated an investigation of appellants' Part B Medicare billings from 1972 through August 1976. On December 18, 1976, the Part B insurance carriers notified appellants that they had been instructed by the Secretary to withhold payments on future Part B claims until completion of the investigation. The carriers asserted that they were proceeding under the regulations which authorize them to suspend payments, 42 C.F.R. Secs. 405.370-. 373 (1982) (describing suspension procedure).²  On December 17, 1976, the government secured a federal grand jury indictment against appellants, nine other doctors, and two other medical corporations for numerous violations of sections 287 (making false claims), 371 (conspiracy to defraud the Government), and 1001 (making false statements) of Title 18. See 18 U.S.C. §§ 287, 371, 1001 (1982). These criminal charges stemmed from appellants' submission of allegedly fraudulent claims for reimbursement under Part B of the Medicare program. In September of 1977, following a jury trial, appellants were acquitted on all eleven of the charges against them. Despite this acquittal, in December, 1978, the Secretary demanded reimbursement from appellant Klein ($10,687.67) and from appellant Alvarado Clinic ($37,277.31) for "overpayments, damages, and costs" in connection with the investigation of appellants' billing practices between 1972 and 1976. The Secretary also threatened a lawsuit by the U.S. Attorney under the False Claims Act, 18 U.S.C. § 231 (1982), to recover interest, double damages and penalties. Appellants resisted these collection efforts.

The Secretary continued the suspension of payments to appellants, instituted in December, 1976, for the next five years, even though appellants were acquitted on the fraud charges, continued to perform services for persons insured under Part B, and continued to submit claims to the carriers based on those services. Indeed, appellants allege that the Secretary notified their patients that appellants' claims were under investigation, and required appellants to continue to accept Medicare claims for payment for services.

As a result of the Secretary's conduct, substantial monies accumulated in appellants' suspended Medicare account. In March, 1981, the Secretary informed appellants that as a result of the investigation of their reimbursement claims, the insurance carriers and the Secretary had determined that appellants had filed false claims between 1972 and 1976 in the amount of $26,737.56. Consequently, in April, 1981, the Secretary ordered the $22,177.95 that had accumulated in appellants' suspended Medicare account transferred to the Federal Supplementary Insurance Trust Fund in partial satisfaction of the $26,737.56 debt owed to the Trust Fund on the allegedly fraudulent claims.

Appellants sought review of the Secretary's determination, with the insurance carriers, of the amount and existence of appellants' debt to the Trust Fund. The Secretary and the insurance carriers informed appellants that the only review available was by an employee of the carrier and that there was no provision for judicial review of that employee's final decision. See 42 U.S.C. § 1395u(b) (3) (C); 42 C.F.R. Sec. 405.820 (1981); United States v. Erika, 456 U.S. at 202-03, 102 S. Ct. at 1651-52. Appellants argued that the decision that they had submitted false claims and owed substantial sums to the Part B Trust Fund was subject, under 42 U.S.C. § 1395y(d) (3), to review by the Secretary in an administrative hearing.³  Appellant sought judicial review of the Secretary's decision under the same section. 42 U.S.C. § 1395y(d) (3). The Regional Director of the Medicare Program insisted that section 1395u governed and that a hearing before the insurance carrier was appellants' only remedy.

Appellants subsequently filed suit in district court pursuant to the provisions for judicial review set forth in 42 U.S.C. § 1395y(d) (3). The Secretary moved for dismissal of the suit on the grounds that the district court had no jurisdiction and, even if it did, appellants had failed to exhaust their administrative remedies by refusing a hearing before the insurance carrier. The district court agreed that appellants had failed to exhaust their administrative remedies and dismissed the complaint. Appellants filed a timely notice of appeal.

ISSUES

We must determine whether the investigation of appellants' Part B Medicare billings was instituted pursuant to the insurance carrier oversight provisions of 42 U.S.C. § 1395u described in United States v. Erika, 456 U.S. at 202, 102 S. Ct. at 1651, or under the Secretary's power to investigate and correct fraud in the Medicare Program, 42 U.S.C. § 1395y(d). If the former provision governs the investigation of appellants, they are not entitled to judicial review and the district court was without jurisdiction to entertain their suit. See Heckler v. Ringer, --- U.S. ----, 104 S. Ct. 2013, 2018 n. 4, 80 L. Ed. 2d 622 (1984) (dicta); United States v. Erika, 456 U.S. at 206-08, 102 S. Ct. 1653-54; Schweiker v. McClure, 456 U.S. 188, 102 S. Ct. 1665, 72 L. Ed. 2d 1 (1982). If the latter provision governs, appellants are entitled to an administrative hearing and judicial review under 42 U.S.C. § 405(g) (1982) and we must then determine if appellants failed to exhaust their administrative remedies by declining the Secretary's offer of review by the insurance carrier.⁴ 

* Section 1395u

A. Purpose and Structure of Section 1395u.

Section 1395u allows the Secretary of Health and Human Services to contract with private insurance carriers for the administration of claims and payments under Part B of the Medicare program.⁵  The principal purpose of the section is to allow the Secretary to take advantage of the experience and efficiency of the private insurance industry to process and pay claims under the Part B Medicare program. See Erika, 456 U.S. at 202, 102 S. Ct. at 1651.

Because of the limited nature of the private carrier's involvement in the Part B program, section 1395u provides only an abbreviated review of a carrier's processing and payment of claims.

If the carrier determines that a claim meets all Part B coverage criteria such as medical necessity and reasonable costs, the carrier pays the claim out of the federal funds.... If the carrier decides that reimbursement in full is not warranted, the statute and the regulations designate an appeal procedure available to dissatisfied claimants. All may request a "review determination," which is a de novo written review hearing before a carrier employee different from the one who initially decided the claim. Claimants who remain dissatisfied and whose appeal involves more than $100 then may petition for an oral hearing before a hearing officer designated by the carrier. See 42 U.S.C. § 1395a(b) (e) (C); 42 C.F.R. Sec. 405.820 (1980). Unless the carrier or the hearing officer decides to reopen the proceeding, the hearing officer's decision is "final and binding upon all parties to the hearing...." 42 C.F.R. Sec. 405.835. Neither the statute nor the Secretary's regulations make further provision for review of hearing officer decisions.

Erika, 456 U.S. at 202-03, 102 S. Ct. at 1651-52 (citations and footnotes omitted) (emphasis added). These provisions for a hearing on overpayment claims before an employee of the Part B Medicare insurance carrier, set forth in 42 U.S.C. § 1395u and 42 C.F.R. Secs. 405.801-.872, were intended to afford "a determination concerning the amount of benefits under Part B where claims will probably be for ... small [ ] amounts...." 456 U.S. at 208 n. 11, 102 S. Ct. at 1654 n. 11 (quoting S.Rep. No. 89-404, 89th Cong., 1st Sess., 54-55). Such carrier hearings were instituted to "avoid overloading the courts with quite minor matters." Id. at 209, 102 S. Ct. 1655. The premise of this limited review procedure, therefore, is that it will address frequent but minor complaints regarding individual bills, often for relatively small amounts.

B. Section 1395u Is Not Applicable To This Case.

In July, 1976, the Secretary of Health and Human Services ordered an investigation of appellants' billing practices; in December of that year, the Secretary instructed the Part B Medicare insurance carriers to suspend payments to appellant pursuant to 42 C.F.R. Secs. 405.370-.373. Appellant was given no opportunity to contest the suspension. The regulations provide for a unilateral suspension of payments only where there is "reliable evidence that the circumstances giving rise to the need for a suspension of payments involves fraud or willful misrepresentation." 42 C.F.R. Sec. 405.371(b). The fact that the investigation of appellants involved an effort to uncover Medicare fraud is confirmed by the indictment of appellants on fraud charges in late 1976. Thus the instant proceedings did not stem from a refusal by a carrier to reimburse appellants for specific services because the services were not medically necessary or reasonably priced. See United States v. Erika, 456 U.S. at 202-03, 102 S. Ct. at 1651-52 (discussing carrier hearing provisions where price of service is in dispute). Instead, payments to appellants for unchallenged claims were withheld because of questions about past claims now under challenge for which payments had already been made to appellants.⁶  Under these circumstances, we cannot reasonably view the proceedings against appellants as a simple claim review like that described in United States v. Erika, authorized by the carrier review provisions of 42 U.S.C. § 1395u and 42 C.F.R. Secs. 405.800-.872.

We find it significant to disposition of the instant case that section 1395u does not authorize carriers to investigate and correct abuse of the Medicare program or fraud in Part B billing practices (except to the extent that the fraud reveals itself in a claim for services that are not medically necessary or reasonably priced). Section 1395u contemplates the insurance carrier addressing each claim for reimbursement for services and either approving the claim and making the payment or rejecting the claim and refusing payment in whole or in part. See 42 C.F.R. Sec. 405.803 (determination of claims by carriers).

In the case at hand, it was not the carrier, but the Secretary, who determined that the bills should not be paid. The carrier was ordered by the Secretary to withhold the payments long after the carrier had already determined that each individual claim met the criteria for coverage under Part B. The carrier was ordered to transfer to the Trust Fund the funds the Secretary had ordered withheld from appellants. The Secretary's order was not made because of objections to current claims but because the Secretary sought recoupment for amounts already paid for earlier claims that she asserted were fraudulent. An agency within the Secretary's department, the Health Care Financing Administration, made the determination of fraud after appellant's acquittal in the criminal case.

The limited review procedures established by 42 U.S.C. § 1395u(b) (3) (C), and approved in United States v. Erika, 456 U.S. 201, 102 S. Ct. 1650, 72 L. Ed. 2d 12 (1982), and Schweiker v. McClure, 456 U.S. 188, 102 S. Ct. 1665, 72 L. Ed. 2d 1 (1982), are intended to apply to carrier reimbursement determinations on a claim by claim basis, as each claim is presented. See Kechijian v. Califano, 621 F.2d 1, 5-6 & nn. 7 & 8 (1st Cir. 1980). The procedures utilized by the Secretary in this case were not section 1395u procedures, nor can it be said that the Secretary's actions were of the type contemplated by Congress to be undertaken pursuant to section 1395u.

II

Section 1395y

A. The Purpose and Structure of Section 1395y.

Section 1395y(d), by contrast, grants the Secretary power to investigate and correct fraud and other abuses of the Medicare program. Subsection (d) (1) states:

No payment may be made under this subchapter with respect to any item or services furnished to an individual by a person where the Secretary determines under this subsection that such person--(A) has knowingly and wilfully made, or caused to be made, any false statement or representation of a material fact for use in an application for payment under this subchapter....

42 U.S.C. § 1395y(d) (1). Subsection (d) (2) authorizes the Secretary to suspend payments to a service provider involved in such allegedly fraudulent transactions. Id. Sec. 1395y(d) (2). As the legislative history of section 1395y(d) indicates, the purpose and scope of the section was to provide the Secretary with power to investigate and correct fraud in the Medicare Program.⁷  This grant of investigative power was further supplemented by a grant of authority to the Secretary to suspend payments to a service provider implicated in such abuse.⁸  The Secretary's determinations of fraud or excess billing are explicitly subject to judicial review. 42 U.S.C. § 1395y(d) (3).⁹ 

B. Section 1395y Is Applicable To This Case.

Several aspects of section 1395y(d) are important in determining the nature of the proceeding against appellant in this case. First, section 1395y(d) is the source of the Secretary's authority to police abuses in all parts of the Medicare program, including Part B. It is also the only source of statutory authority for suspending payments of future claims to approved Medicare service providers. Finally, section 1395y(d) contemplates action by the Secretary on a larger scale than rejection of individual claims submitted by service providers on a claim by claim basis.

The abuses that Congress intended to correct by enacting section 1395y(d) and the procedures for correcting these abuses describe quite precisely the very type of allegations of wrongdoing and action undertaken by the Secretary with respect to appellants. Only section 1395y(d) of Title 42 authorizes the kind of fraud investigation and suspension of payments initiated by the Secretary here. The procedures utilized by the Secretary are unlike anything authorized by the carrier provisions of section 1395u and its implementing regulations.¹⁰  We presume regularity on the part of the Secretary and accordingly conclude that the proceedings against appellants were authorized by and conducted pursuant to 42 U.S.C. § 1395y(d).¹¹ 

C. Judicial Review Is Available Under 42 U.S.C. § 405(g).

Section 1395y(d) (3) provides that any person who is dissatisfied with the Secretary's determination under this section is entitled to notice and a hearing from the Secretary and to judicial review of the Secretary's post-hearing decision under 42 U.S.C. § 405(g).¹²  In this case the Secretary made a determination that appellants had made false statements and had overbilled, a determination within her authority under section 1395y(d) (1) (A) & (B). Therefore, appellants are entitled to notice and hearing under section 1395y(a), (d).¹³ 

The Secretary's mistaken view that she can proceed under 42 C.F.R. Sec. 405.370-. 373 and thereby avoid judicial review cannot change this result. To be sure, those regulations appear to implement section 1395u and, thus, proceedings under them would not normally be subject to judicial review.¹⁴  The regulations are for reviews of carriers and contemplate procedures entirely different from those followed by the Secretary in this case. Moreover, unilateral supervision of payments under 42 C.F.R. Sec. 405.371(b) requires evidence of fraud or willful misrepresentation. Id. Since appellants were acquitted of fraud charges brought by the Secretary in criminal proceedings, this regulation provides scant support for the continued suspension of payments. See id. Moreover, as shown above, the suspensions here were not initiated by the carriers but by the Secretary. The Secretary treats the case as involving recoupment of payments for multiple fraudulent claims. The Secretary's determinations of fraud, however, are expressly made subject to judicial review by section 1395y(d). Fraud, civil or criminal, is a serious charge. The Secretary cannot avoid judicial review by simply asserting that she is proceeding under a section that does not provide for judicial review. Such an interpretation would make section 1395y superfluous. Congress quite properly intended that persons accused of fraud have access to judicial review.

The district court therefore had subject matter jurisdiction to hear appellants' complaint. See Kechijian v. Califano, 621 F.2d 1, 6 (1st Cir. 1980); Eisenberg v. Mathews, 420 F. Supp. 1274 (E.D. Pa. 1979).

III

Exhaustion of Administrative Remedies

The district court dismissed appellants' suit for failure to exhaust administrative remedies. Section 1395y(d) (3), through section 405(g), imposes a statutory requirement that a claimant exhaust administrative remedies before seeking judicial review, see 42 U.S.C. § 1395y(d) (3); Heckler v. Ringer, --- U.S. ----, 104 S. Ct. 2013, 80 L. Ed. 2d 622 (1984); Weinberger v. Salfi, 422 U.S. 749, 766, 95 S. Ct. 2457, 2467, 45 L. Ed. 2d 522 (1975). Section 1395y(d) (3) also provides for an administrative hearing by the Secretary to result in a "final decision" which is then subject to judicial review. Id.

In this case, however, the Regional Director of the Medicare Program informed appellants unequivocally that they were not entitled to review of their claim by the Secretary. The carrier review procedure offered appellants was not equivalent to the administrative review envisioned by section 405(b), made applicable through section 1395y(d) (3). Under these circumstances, we find the language of the Supreme Court in Weinberger v. Salfi applicable:

Once a [claimant] has presented his or her claim at a sufficiently high level of review to satisfy the Secretary's administrative needs, further exhaustion would not merely be futile for the applicant, but would also be a commitment of administrative resources unsupported by any administrative or judicial interest.

422 U.S. at 765-66, 95 S. Ct. at 2466-67. See also Mathews v. Diaz, 426 U.S. 67, 96 S. Ct. 1883, 48 L. Ed. 2d 478 (1976) (Secretary waived exhaustion requirement by stipulating that claims could be denied on their merits); Lopez v. Heckler, 725 F.2d 1489, 1500-03 (9th Cir. 1984) (exhaustion futile when Secretary refuses to follow the law). The Secretary cannot complain of failure to exhaust administrative remedies when she refuses to provide the appropriate ones. See Lopez, 725 F.2d at 1503. Accordingly, we find that appellants exhausted their administrative remedies before they filed suit in district court. We hold that the Secretary's decision that appellants had submitted false claims and owed some $27,000 to the Part B Trust Fund was a determination of fraud within section 1395y(d) (3).

CONCLUSION

Appellants are entitled to the review procedures outlined in 42 U.S.C. § 1395y(d) (3). We reverse the district court's dismissal of appellants' action and remand to the district court with direction to return the case to the Secretary for a hearing in compliance with section 1395y(d) (3). If appellants remain dissatisfied after the Secretary issues a final decision, appellants may seek judicial review of the merits of that decision under section 1395y(d) (3).

We deny the petition for rehearing. The opinion filed December 20, 1983 is withdrawn and this opinion substituted in its stead. No further petitions for rehearing will be entertained. REVERSED and REMANDED.