Marina Mercy Hospital v. Patricia Harris, Secretary of Health and Human Services

Appellant Marina Mercy Hospital (the Hospital) is a qualified “provider of services” under the Medicare program. It is a limited partnership whose sole general partner is Mercy Management Corporation (MMC). MMC has two shareholders, Frances Taylor, M.D., and William Born. Taylor and Born together also own 20.46% of the limited partnership interests in the Hospital; the remaining interests are dispersed in small blocs among 54 other limited partners.

As a “provider of services”, the Hospital is entitled to reimbursement for the “reasonable cost” of hospital services provided to Medicare beneficiaries. 42 U.S.C. §§ 1395f(b), 1395x(v). The Hospital’s claims for reimbursement are audited by Blue Cross of Southern California, which acts as a “fiscal intermediary” of the Secretary of Health and Human Services. Id. § 1395h. Blue Cross disallowed reimbursement for amounts the Hospital paid MMC for management services in excess of MMC’s actual cost of rendering the services, consisting of $109,424 of the $190,495 paid MMC in 1973 and $222,376 of the $249,221 paid in 1974. The disallowance was based upon Blue Cross’ determination that MMC was “related to” the Hospital within the meaning of…