Daniel C. Fanning, Individually v. the United States of America

PRECEDENTIAL
Filed October 10, 2003
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 01-3366
DANIEL C. FANNING, INDIVIDUALLY, AND AS
REPRESENTATIVE OF A CLASS OF PERSONS
SIMILARLY SITUATED
v.
THE UNITED STATES OF AMERICA; UNITED STATES
HEALTH CARE FINANCING ADMINISTRATION; UNITED
STATES DEPARTMENT OF DEFENSE; UNITED STATES
DEPARTMENT OF HEALTH AND HUMAN SERVICES;
UNITED STATES DEPARTMENT OF THE ARMY; UNITED
STATES DEPARTMENT OF THE NAVY; UNITED STATES
DEPARTMENT OF THE AIR FORCE; UNITED STATES
INDIAN HEALTH SERVICE; UNITED STATES
DEPARTMENT OF VETERANS AFFAIRS; MICHAEL
MCMULLEN, MRS., AS ACTING DEPUTY ADMINISTRATOR
OF THE UNITED STATES HEALTH CARE FINANCING
ADMINISTRATION; DONALD H. RUMSFELD, AS
SECRETARY OF DEFENSE; TOMMY G. THOMPSON, AS
SECRETARY OF THE DEPARTMENT OF HEALTH AND
HUMAN SERVICES; GREGORY R. DAHLBERG, THE
HONORABLE, AS ACTING SECRETARY OF THE ARMY;
ROBERT B. PIRIE, JR., THE HONORABLE, AS ACTING
SECRETARY OF THE NAVY; LAWRENCE DELANEY, THE
HONORABLE DR., AS SECRETARY OF THE AIR FORCE;
MICHAEL H. TRUJILLO, M.D., M.P.H., AS DIRECTOR OF
THE INDIAN HEALTH SERVICE; ANTHONY J. PRINCIPI,
THE HONORABLE, AS SECRETARY OF THE
DEPARTMENT OF VETERANS AFFAIRS;

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ROBERT E. WELSH, JR., ESQUIRE, AS ADMINISTRATOR
OF THE ACROMED SETTLEMENT AGREEMENT; PNC
BANK, N.A., AS TRUSTEE FOR THE ACROMED
SETTLEMENT AGREEMENT
United States of America, the Centers for Medicare and
Medicaid Services (formerly the Health Care Financing
Administration), the United States Department of Health
and Human Services, Tommy G. Thompson in his
capacity as Secretary of the United States Department of
Health and Human Services, and Thomas Scully in his
capacity as Administrator of the Centers for Medicare and
Medicaid Services (formerly Administrator of the Health
Care Financing Administration),
Appellants
On Appeal From the United States District Court
For the Eastern District of Pennsylvania
(D.C. Civil Action No. 01-cv-01029)
District Judge: Hon. Ronald L. Buckwalter
Argued June 10, 2002
BEFORE: SLOVITER, ROTH, and MCKEE, Circuit Judges
(Opinion Filed: October 10, 2003)
Robert D. McCallum, Jr., Esq.
Assistant Attorney General
Patrick L. Meehan, Esq.
United States Attorney
Mark B. Stern, Esq.
Alisa B. Klein, Esq. (Argued)
Attorneys, Appellate Staff
Civil Division, Room 9530
Department of Justice
601 D Street, N.W.
Washington, D.C. 20530-0001
Attorneys for Appellants
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Arnold Levin, Esq.
Michael D. Fishbein, Esq. (Argued)
Zanetta Moore-Driggers, Esq.
Levin, Fishbein, Sedran & Berman
510 Walnut Street, Suite 500
Philadelphia, PA 19106
Attorneys for Appellee
Robert E. Welsh, Jr., Esq.
Welsh & Recker
2000 Market Street
Suite 2903
Philadelphia, PA 19103
As Administrator of the AcroMed
Settlement Agreement
OPINION OF THE COURT
MCKEE, Circuit Judge.
This litigation is the aftermath of an attempt by the
Health Care Financing Administration (“HCFA”) (now known
as the Centers for Medicare and Medicaid Services (“CMS”)),
to obtain reimbursement under the Medicare as Secondary
Payer statute, 42 U.S.C. § 1395y(b)(2). HCFA attempted to
collect from a settlement trust fund for Medicare payments
that had been made to AcroMed settlement class members
for various medical expenses arising from injuries the
settlement class members allegedly suffered as a result of
the use of orthopedic bone screws manufactured by
AcroMed. Daniel Fanning filed an amended complaint for
declaratory and injunctive relief in an attempt to prevent
the HCFA from obtaining Medicare reimbursement. Fanning
filed the complaint on his own behalf and on behalf of the
class in an attempt to prevent the HCFA from obtaining any
of the proceeds of the settlement fund.1
The district court certified the class and granted
preliminary relief enjoining the HCFA from attempting to
1. Fanning’s amended complaint invoked the district court’s federal
question jurisdiction pursuant to 28 U.S.C. § 1331.
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obtain MSP reimbursement from the settlement trust fund.
However, because we find that the district court did not
have federal question jurisdiction, we will reverse and
remand with instructions to dismiss the amended
complaint.
I. BACKGROUND
A. THE MEDICARE AS SECONDARY PAYER STATUTE
Prior to 1980, Medicare generally paid for medical
services whether or not the recipient was also covered by
another health plan. See Social Security Amendments of
1965, Pub. L. No. 89-97, § 1862(b), 79 Stat. 286. However,
beginning in 1980, Congress enacted a series of cost
cutting amendments to the Medicare program. These
amendments are collectively known as the Medicare as
Secondary Payer (“MSP”) statute or the MSP provisions. See
New York Life Ins. Co. v. United States, 190 F.3d 1372,
1374 (Fed. Cir. 1999).2
The MSP statute was designed to curb skyrocketing
health costs and preserve the fiscal integrity of the
Medicare system. See Zinman v. Shalala, 67 F.3d 841, 845
(9th Cir. 1995); H.R. Rep. No. 96-1167, at 352 (1980). The
MSP attempted to lower overall federal Medicare
disbursements by requiring Medicare beneficiaries to
exhaust all available insurance coverage before looking to
Medicare’s coverage. See United States v. Rhode Island
Insurers’ Insolvency Fund, 80 F.3d 616, 618 (1st Cir. 1996).
The MSP assigns primary responsibility for medical bills of
Medicare recipients to private health plans when a
Medicare recipient is also covered by private insurance.
These private plans are therefore considered “primary”
under the MSP and Medicare acts as the “secondary” payer
responsible only for paying amounts not covered by the
primary plan.3 Blue Cross and Blue Shield of Texas v.
Shalala, 995 F.2d 70, 73 (5th Cir. 1993).
2. The amendments have been codified at 42 U.S.C. § 1395y(b).
3. “Before 1980, if a Medicare beneficiary had an alternate source of
payment, such as private insurance or an employee group health plan,
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Congress established two principal directives to achieve
this objective. First, the MSP bars Medicare payments
where “payment has already been made or can reasonably
be expected to be made promptly (as determined in
accordance with regulations)” by a primary plan. 42 U.S.C.
§ 1395y(b)(2)(A) (parenthetical in original). “Prompt”
payment is defined in the applicable regulations as
payment made within 120 days of either the date on which
care was provided or when the claim was filed with the
insurer, whichever is earlier. See 42 C.F.R. §§ 411.21,
411.50. The MSP defines a “primary plan” as “a workmen’s
compensation law or plan, an automobile or liability
insurance policy or plan (including a self-insured plan) or
no fault insurance[.]” 42 U.S.C. § 1395y(b)(2)(A)(ii)
(parenthetical in original). This provision “is intended to
keep the government from paying a medical bill where it is
clear an insurance company will pay instead.” Evanston
Hosp. v. Hauck, 1 F.3d 540, 544 (7th Cir. 1993) (citation
omitted).
Second, the MSP provides that when Medicare makes a
payment that a primary plan was responsible for, the
payment is merely conditional and Medicare is entitled to
reimbursement for it. 42 U.S.C. § 1395(y)(b)(2)(B); Blue
Cross and Blue Shield of Texas v. Shalala, 995 F.2d 70, 73
(5th Cir. 1993) (2002). Section 1395y(b)(2)(B) provides:
Any payment under this subchapter with respect to
any item or service to which subparagraph (A) applies
shall be conditioned on reimbursement to the
appropriate Trust Fund established by this subchapter
when notice or other information is received that
payment for such item or service has been or could be
made under such subparagraph.
42 U.S.C. § 1395y(b)(2)(B)(i). Medicare payments are subject
Medicare was the primary payer, and the health plan was the secondary
payer, liable only for the costs that remained after Medicare made its
payments. Private insurers even wrote this practice into their health
insurance contracts. Congress enacted the MSP statute to reverse the
order of payment in cases where Medicare beneficiaries have an alternate
source of payment for health care.” Blue Cross and Blue Shield of Texas,
995 F.2d at 73 (citations omitted).
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to reimbursement to the appropriate Medicare Trust Fund
once the government receives notice that a third-party
payment has been or could be made with respect to the
same item or service.4 Id.
B. THE ACROMED LITIGATION
As noted above, the controversy surrounding the
Medicare payments at issue here arose from a class action
settlement of claims pertaining to orthopedic bone screws
manufactured by AcroMed. AcroMed began marketing
orthopedic bone screw devices for use in spinal fusion
surgery in 1983. By the early part of the 1990s, thousands
of individuals who had undergone spinal fusion surgery
experienced complications and infirmities that they
associated with AcroMed’s bonescrews. A flood of product
liability suits against AcroMed followed. See In re
Orthopedic Bone Screw Products Liability Litigation, 176
F.R.D. 158, 165 (E.D. Pa. 1997). In 1994, the Judicial
Panel on Multidistrict Litigation transferred all of the
pending cases to the United States District Court for the
Eastern District of Pennsylvania for pre-trial proceedings.
Id. On January 8, 1997, Daniel Fanning, acting as a class
representative, reached a settlement with AcroMed on
behalf of the class. Id. Pursuant to the terms of that
settlement, AcroMed transferred $100 million into a trust
fund for distribution to class members who qualified for
payment in accordance with a procedure to be established
by the court.5 Id. at 165-166.
Since members of the settlement class had previously
received Medicare payments for medical expenses allegedly
4. If MSP reimbursement is not made, the MSP authorizes the
government to bring an action against “any entity which is required or
responsible . . . to make payment . . . under a primary plan” and against
“any other entity (including a physician or provider) that has received
payment from that entity.” 42 U.S.C. § 1395y(b)(2)(B)(ii). The MSP also
gives the government a separate right of subrogation. 42 U.S.C.
§ 1395y(b)(2)(iii).
5. In addition to the $100 million, AcroMed agreed to “assign the
proceeds of virtually all of its insurance policies to the settlement fund.”
176 F.R.D. at 166.
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stemming from injuries caused by AcroMed’s bone screws,
the government filed a Statement of Interest in the district
court after learning of the proposed AcroMed settlement. In
that Statement of Interest, the government stated that,
pursuant to the “secondary payer” provisions of the MSP, it
intended to recover amounts Medicare had paid for the
class members’ medical care.
When efforts to settle the government claims broke down,
the government sent letters to the approximately 1,800
members of the settlement class demanding repayment of
the amounts Medicare had paid for medical treatment. The
letters gave each class member 60 days to repay the
amount set forth in each letter and warned that if the
amount remained unpaid after 60 days, interest would
accrue at the rate of 13.75% per annum until the debt was
paid, regardless of whether a waiver of recovery request or
administrative appeal was pending. The letters also told the
class members that if they did not pay, Medicare could
recover the outstanding balance from other federal benefits
the individual plaintiff might otherwise be entitled to
including additional Medicare payments, Social Security
benefits and Railroad Retirement benefits. The letters
similarly threatened that delinquencies would be reported
to the Treasury Department for offset against any other
federal payments the class members might otherwise
receive. (On March 21, 2001, Fanning filed an amended
complaint alleging that payments from the AcroMed
settlement are not the type of payments that give the
government a right to reimbursement under the MSP. The
amended complaint sought a permanent injunction barring
the government from taking any action to enforce the rights
asserted under the MSP. Concomitantly, Fanning filed a
motion for a preliminary injunction and a motion for class
certification.
The government responded with a motion to dismiss for
lack of jurisdiction, arguing that 42 U.S.C. § 405(h) requires
exhaustion of administrative remedies before claims that
arise under the Medicare Act could be subjected to judicial
review.6
6. The government also opposed the motions for a preliminary injunction
and for class certification.
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The district court denied the government’s motion to
dismiss, certified the class and entered a preliminary
injunction barring the government from taking any action
to obtain reimbursement for Medicare payments from the
class members. In re Orthopedic Bone Screw Litigation
Products Liability Litigation (Fanning v. United States), 202
F.R.D. 154 (E.D. Pa. 2001). The court rejected the
government’s claim that the court lacked federal question
jurisdiction under 42 U.S.C. § 405(h). The court found that
§ 405(h) did not apply to the settlement class members
because they were not trying to recover Medicare benefits.
Rather, in the court’s view, the class members were
attempting to enjoin collection of benefits the government
had already paid. Id. at 170.
This appeal followed.
II. DISCUSSION — FEDERAL QUESTION
JURISDICTION
We have appellate jurisdiction over the district court’s
grant of preliminary injunctive relief pursuant to 28 U.S.C.
§ 1292(a)(1). However, the government renews its argument
that the district court lacked jurisdiction because of the
failure to exhaust administrative remedies. Therefore,
before we can address the merits of the government’s
appeal, we must determine if the district court had
jurisdiction over Fanning’s amended class action complaint.7
It is obvious that when another insurer makes a payment
for medical services Medicare has already paid for, a
duplicate payment results. In the absence of
reimbursement to Medicare, the duplicate payment is an
overpayment of Medicare under the MSP. See 42 C.F.R.
§ 405.704(b)(13); Buckner v. Heckler, 804 F.2d 258, 259
(4th Cir. 1986). As we have discussed, the MSP allows the
Secretary to obtain reimbursement of the overpayment. 42
7. A court of appeals has the obligation, not only to satisfy itself that it
has appellate jurisdiction, but also to satisfy itself of the jurisdiction of
the district court under review. Dole v. Trinity Industries, Inc., 904 F.2d
867, 870 (3d Cir. 1990). Our standard of review of the district court’s
determination that it had jurisdiction is plenary. Id.
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U.S.C. §§ 1395y(b)(2)(A)(ii), 1395y(b)(2)(B)(ii). However, a
beneficiary who disagrees with the Secretary’s
determination that an overpayment of Medicare benefits
has been made on his or her behalf is entitled to a hearing
before the Secretary as provided in 42 U.S.C. § 405(b). See
42 U.S.C. § 1395ff(b)(1). If the beneficiary is dissatisfied
with the Secretary’s final decision after a hearing, the
beneficiary is entitled to judicial review of that decision as
provided in 42 U.S.C. § 405(g).8 See Id.
The AcroMed settlement class members did not use the
administrative procedure to challenge the government’s
efforts to obtain MSP reimbursement from the settlement
trust fund. Instead, as noted above, Fanning filed an
amended class action complaint pursuant to 28 U.S.C.
§ 1331 against various government defendants seeking
class certification and injunctive relief to prevent the
government from seeking reimbursement of the alleged
Medicare overpayments. As noted, the government moved,
inter alia, to dismiss the amended complaint for lack of
jurisdiction; however, the district court denied the
government’s motion to dismiss.
8. 42 U.S.C. § 405(g) provides in relevant part:
Any individual, after any final decision of the Commissioner of
Social Security made after a hearing to which he was a party,
irrespective of the amount in controversy, may obtain a review of
such decision by a civil action commenced within sixty days after
the mailing to him of notice of such decision or within such further
time as the Commissioner of Social Security may allow. . . . As part
of the Commissioner’s answer the Commissioner . . . shall file a
certified copy of the transcript of the record including the evidence
upon which the findings and decision complained of are based. The
court shall have power to enter, upon the pleadings and transcript
of the record, a judgment affirming, modifying, or reversing the
decision of the Commissioner of Social Security, with or without
remanding the cause for a rehearing. . . . The judgment of the court
shall be final except that it shall be subject to review in the same
manner as a judgment in other civil action. Any action instituted in
accordance with this subsection shall survive notwithstanding any
change in the person occupying the office of Commissioner of Social
Security or any vacancy in such office.
42 U.S.C. § 405(g).
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The government’s argument that the district court lacked
jurisdiction is based on 42 U.S.C. § 405(h), a section of the
Social Security Act that is made applicable to the Medicare
Act by 42 U.S.C. § 1395ii.9 Section 405(h), captioned
“Finality of Commissioner’s decision,” reads:
The findings and decision of the Commissioner of
Social Security after a hearing shall be binding upon
all individuals who were parties to such hearing. No
findings of fact or decision of the Commissioner of
Social Security shall be reviewed by any person,
tribunal, or governmental agency except as herein
provided. No action against the United States, the
Commissioner of Social Security, or any officer or
employee thereof shall be brought under section 1331 or
1346 [federal defendant jurisdiction] of Title 28 to
recover on any claim arising under this subchapter.
42 U.S.C. § 405(h) (emphasis added). The government
contends that the district court lacked jurisdiction over
Fanning’s amended class action complaint because § 405(h)
requires exhaustion of administrative remedies before
claims that arise under the Medicare Act may be subject to
judicial review. However, as is explained below, we believe
that the technically correct argument is that § 405(h) bars
federal question jurisdiction of Fanning’s class action
complaint and requires that the class members “must
proceed instead through the special review channel that the
Medicare statutes create.” Shalala v. Illinois Council on Long
Term Care, Inc., 529 U.S. 1, 5 (2000).
Section 405(h) contains three sentences, but it is the
third sentence that is critical to our jurisdictional inquiry.
It reads: “No action against the United States, the
Commissioner of Social Security, or any officer or employee
thereof shall be brought under section 1331 or 1346
[federal defendant jurisdiction] of Title 28 to recover on any
claim arising under this subchapter.” If Fanning’s class
action complaint asserts a claim that “aris[es] under” the
9. The Medicare Act, 42 U.S.C. §§ 1395-1395zz, is Title XVIII of the
Social Security Act. Section 1395ii of the Medicare Act makes § 405(h)
applicable to the Medicare Act “to the same extent as” it applies to the
Social Security Act.
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Medicare Act, then the third sentence of § 405(h) precludes
the district court from exercising federal question
jurisdiction over it. Although the issue of whether a claim
arises under a particular statute appears at first glance to
require nothing more than a reading of the statute, our
analysis of whether the class action complaint alleges a
“claim arising under” the Medicare Act requires us to first
examine four cases in which the Supreme Court discussed
the operation and meaning of § 405(h) before relying solely
on the “plain text” of the statute.
The first is Weinberger v. Salfi, 422 U.S. 749 (1975).
There, a deceased wage earner’s widow and step-child
challenged the Social Security Act’s requirement of a nine-
month long prior relationship with the deceased wage
earner as a condition of receiving survivor’s benefits.
Concetta Salfi married Londo Salfi on May 27, 1972. In
spite of Londo’s apparent good health, he suffered a heart
attack less than a month later and died on November 21,
1972, less than six months after the marriage. His widow
filed applications for mother’s insurance benefits for herself
and her daughter by a previous marriage. However, the
applications were denied by the Social Security
Administration, both initially and on reconsideration at the
regional level, solely on the basis of the Act’s duration-of-
relationship provisions.
The widow and other named plaintiffs then filed an action
in the district court, “principally relying on 28 U.S.C.
§ 1331 for jurisdiction,” challenging the duration-of-
relationship provision on due process and equal protection
grounds. 422 U.S. at 755. The widow also sought to
represent a class of all widows and stepchildren who had
been denied benefits based solely on the Act’s duration-of-
relationship provisions. The widow and the named plaintiffs
alleged partial exhaustion of their claims, but made no
similar allegations with regard to the claims of other class
members. On cross-motions for summary judgment, a
three-judge district court panel held that the duration-of-
relationship provision was unconstitutional, certified the
class and enjoined the Social Security Administration from
denying benefits on the basis of the duration-of-relationship
provision.
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On appeal, the Supreme Court ultimately concluded that
the duration-of-relationship provision was constitutional.
However, before it reached the merits, the Count noted that
it was “confronted . . . by a serious question as to whether
the District Court had jurisdiction over th[e] suit.” 422 U.S.
at 756. It is, of course, that jurisdictional discussion that is
relevant to our inquiry.
The Court began its jurisdictional inquiry by noting that
the third sentence of § 405(h) “[o]n its face, . . . bars district
court federal-question jurisdiction over suits, such as this
one, which seek to recover Social Security benefits.” Id. at
756-757. Yet, the widow successfully invoked the district
court’s federal question § 1331 jurisdiction and the district
court considered the third sentence “inapplicable because it
amounted to no more than a codification of the doctrine of
exhaustion of administrative remedies.” Id. at 757.
Therefore, the district court found that exhaustion would
be futile and waived the requirement. See Salfi v.
Weinberger, 373 F.Supp. 961, 964 (N.D. Cal. 1974).
However, the Supreme Court believed that the district
court’s conclusion that § 405(h) is simply an exhaustion
requirement was “entirely too narrow” and held that the
third sentence of § 405(h) is more than that. Id. at 757. It
wrote:
That the third sentence of § 405(h) is more than a
codified requirement of administrative exhaustion is
plain from its own language, which is sweeping and
direct and which states that no action shall be brought
under § 1331, not merely that only those actions shall
be brought in which administrative remedies have been
exhausted. Moreover, if the third sentence is construed
to be nothing more that a requirement of
administrative exhaustion, it would be superfluous.
This is because the first two sentences of § 405(h) . . .
assure that administrative exhaustion will be required.
Specifically, they prevent review of decisions of the
Secretary save as provided in the Act, which provision
is made in § 405(g). This latter section prescribes
typical requirements for review of matters before an
administrative agency, including administrative
exhaustion. Thus the District Court’s treatment of the
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third sentence of § 405(h) not only ignored that
sentence’s plain language, but also relegated it to a
function which is already performed by other statutory
provisions.
Id. at 757-758. Although the Court made it abundantly
clear that the third sentence of § 405(h) was something
more than a mere exhaustion requirement, it did not fully
define the reach of that language.
In any event, the Court next addressed a “somewhat
more substantial argument” that the third sentence of
§ 405(h) did not deprive the district court of federal
question jurisdiction. Id. at 760. By its terms, the third
sentence only concerns actions to recover “on any claim
arising” under the Act. Not unexpectedly, the widow argued
that her claim was not one arising under the Act, but was
rather a claim under the constitution. Id. Therefore, the
widow concluded, § 405(h) did not prevent the district court
from having federal question jurisdiction over her
complaint. However, the Court rejected that argument as
well. It wrote:
It would, of course, be fruitless to contend that . . . the
claim is one which does not arise under the
Constitution, since [the widow’s] constitutional
arguments are critical to [her] complaint. But it is just
as fruitless to argue that this action does not also arise
under the Social Security Act. For not only is it Social
Security benefits which appellees seek to recover, but it
is the Social Security Act which provides both the
standing and the substantive basis for the presentation
of their constitutional contentions. Appellees sought,
and the District Court granted, a judgment directing
the Secretary to pay Social Security benefits. To
contend that such an action does not arise under the
Act whose benefits are sought is to ignore both the
language and substance of the complaint and
judgment. This being so, the third sentence of § 405(h)
precludes resort to federal-question jurisdiction for the
adjudication of appellees’ constitutional contentions.
Id. at 760-761 (emphasis added). The Court also held that
the operation of § 405(h) is not limited to “decisions of the
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Secretary on issues of law or fact.” Id. at 762. Rather,
§ 405(h) “extends to any ‘action’ seeking to recover on any
(Social Security) claim’ — irrespective of whether resort to
judicial processes is necessitated by discretionary decisions
of the Secretary or by his nondiscretionary application of
allegedly unconstitutional statutory restrictions.” Id.
(emphasis added). Finally, insofar as constitutional
challenges are concerned, the Court found that the Social
Security Act “itself provides jurisdiction for constitutional
challenges to its provisions.” Id. Therefore, the Court held
that “the plain words of the third sentence of § 405(h) do
not preclude constitutional challenges.”
They simply require that they be brought under
jurisdictional grants contained in the Act, and thus in
conformity with the same standards which are
applicable to nonconstitutional claims arising under
the Act. The result is not only of unquestionable
constitutionality, but it is also manifestly reasonable,
since it assures the Secretary the opportunity prior to
constitutional litigation to ascertain, for example, that
the particular claims involved are neither invalid for
other reasons nor allowable under other provisions of
the Social Security Act.
Id. Accordingly, the Court held that § 405(h) barred the
claims asserted under the district court’s federal question
jurisdiction.10
The second case is Heckler v. Ringer, 466 U.S. 602
(1984), in which the Court reaffirmed Weinberger v. Salfi
and extended its holding to the Medicare Act. There, four
Medicare beneficiaries invoked the district court’s federal
question jurisdiction and brought an action challenging the
Secretary’s policy and ruling that no Medicare payments
would be provided for a surgical procedure known as a
bilateral carotid body resection (“BCBR”). They alleged that
the policy and ruling violated the Medicare Act, the
10. As noted, the widow alleged partial exhaustion of her claims, but
made no such allegations as to the class members. For reasons not
relevant to our discussion, the Court found that the widow and other
named plaintiffs who alleged partial exhaustion could assert their claims
in the district court under § 405(g). 422 U.S. at 767.
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Administrative Procedure Act and the Due Process clause.
Id. at 611 n.7. They sought declaratory and injunctive
relief, including invalidation of the policy and ruling as well
as an order enjoining the Secretary from applying it.
The district court dismissed their complaint for lack of
jurisdiction. It held that, in essence, the plaintiffs were
claiming an entitlement to benefits for the BCBR procedure
and that any challenges to the Secretary’s policy and ruling
were “inextricably intertwined” with their claim for benefits.
Id. at 611. Therefore, the district court concluded that
405(g) with its exhaustion prerequisite provided the sole
avenue for judicial review. Because none of the four
plaintiffs had satisfied the exhaustion requirement, the
district court dismissed their complaint. Id. at 612.
The court of appeals reversed. It concluded that plaintiffs
were actually arguing that the policy and ruling were “an
unlawful administrative mechanism for determining the
awards of benefits.” Id. The court reasoned that, to the
extent that the plaintiffs sought to invalidate the Secretary’s
method for determining entitlement to benefits, the claim
was a procedural one cognizable under § 1331 without any
condition of exhaustion. Id. The court of appeals also
agreed with the district court’s conclusion that the plaintiffs
had raised a substantive claim for benefits. However, while
acknowledging that exhaustion was a prerequisite for a
benefits claim under § 405(g), the court of appeals refused
to dismiss the complaint based upon its belief that
exhaustion would be futile.
The Supreme Court reversed the court of appeals. It
agreed with the district court and the court of appeals that
the claims were really for benefits, but rejected the court of
appeals’s attempt to separate the particular claims into
procedural claims (i.e., challenges to the Secretary’s method
of rule making), and substantive claims (i.e., claims for
benefits). Rather, in the Supreme Court’s view, plaintiffs’
procedural claim was “inextricably intertwined” with the
substantive claim. Id. at 614. Accordingly, the Court held
that “all aspects of respondent’s claim for benefits should
be channeled first into the administrative process which
Congress has provided for the determination of claims for
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benefits.” Id. at 614 (emphasis added). Its explained this
“channeling” requirement as follows:
The third sentence of 42 U.S.C. § 405(h), made
applicable to the Medicare Act by 42 U.S.C. § 1395ii,
provides that 405(g), to the exclusion of 28 U.S.C.
§ 1331, is the sole avenue for judicial review for all
“claims arising under” the Medicare Act. See
Weinberger v. Salfi, 422 U.S. at 760-761. Thus, to be
true to the language of the statute, the inquiry in
determining whether § 405(h) bars federal-question
jurisdiction must be whether the claim “arises under”
the Act, not whether it lends itself to a “substantive”
rather than a “procedural” label. See Mathews v.
Eldridge, 424 U.S. [319] at 327 [1976] (recognizing that
federal-question jurisdiction is barred by 42 U.S.C.
§ 405(h) even in a case where the claimant is
challenging the administrative procedures used to
terminate welfare benefits).
In Weinberger v. Salfi, 422 U.S. at 760-761, we
construed the “claim arising under” language quite
broadly to include any claims in which “both the
standing and the substantive basis for the
presentation” of the claims is the Social Security Act.
In that case we held that a constitutional challenge to
the duration-of-relationship eligibility statute pursuant
to which the claimant had been denied benefits, was a
“claim arising under” Title II of the Social Security Act
within the meaning of 42 U.S.C. § 405(h), even though
we recognized that it was in one sense also a claim
arising under the Constitution.
Id. at 614-615. The Court concluded that under Salfi’s
“broad test,” the plaintiffs’ claims were not cognizable under
federal-question jurisdiction because the Medicare Act
provided both the substance and standing for the claims.
That is to say, the claims “arise under” the Medicare Act.
Id. at 615. Therefore, the third sentence of § 405(h)
precluded the district court from having federal question
jurisdiction. The only avenue for judicial review was
§ 405(g). Id. at 617.
The third case relevant to the instant inquiry is Bowen v.
Michigan Academy of Family Physicians, 476 U.S. 667
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(1986), which appeared to limit the holdings of Salfi and
Ringer. Michigan Academy involved a challenge by an
association of family physicians to a Medicare regulation
which authorized payment of Part B benefits in different
amounts for similar services. The district court held that
the regulation violated several provisions of the Medicare
Act and found it invalid. Therefore, the court did not need
to address the physicians’ constitutional claims. On appeal,
the court of appeals agreed that the regulation was
inconsistent with the Act and, therefore, irrational and
invalid. The court of appeals also declined to address the
physicians’ constitutional claims.
The Secretary did not challenge the decision on the
merits on appeal to the Supreme Court. Rather, he renewed
the jurisdictional argument that the district court and court
of appeals had rejected. He claimed that §§ 1395ff and
1395ii (which, as noted, makes § 405(h) applicable to the
Medicare Act) forbid judicial review under the district
court’s federal question jurisdiction of all questions
affecting the amount of benefits payable under Part B of the
Medicare program. At the time of the litigation in Michigan
Academy, § 1395ff of the Medicare Act did not provide any
administrative or judicial review of Part B benefit amount
determinations. The scheme at that time was as follows:
Under Part B, the Secretary contracted with private health
insurance carriers to provide benefits, and the Medicare
participants voluntarily payed a premium for those benefits.
476 U.S. at 674. Although it was federally subsidized, Part
B coverage was an option intended to supplement
mandatory institutional health benefits such as coverage
for hospital expenses covered by Part A. Id. at 674-675.
Individuals aggrieved by delayed or insufficient payment
with respect to Part B benefits were entitled to a hearing by
the private carrier, subject to an amount-in-controversy
requirement. In comparison, an aggrieved individual under
Part A was entitled to a hearing by the Secretary and to
judicial review, also subject to an amount-in-controversy
requirement. Id. at 675.
In deciding the case, the Court noted that the “strong
presumption” in favor of judicial review of administrative
action, Id. at 670, can only be overcome by congressional
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intent evidenced by “specific language,” Id. at 673, or by
“inferences of intent drawn from the statutory scheme as a
whole.” Id. at 673 n.4. Applying those principles, the Court
found that the Act and its legislative history demonstrated
a Congressional intention to “bar judicial review only of
determinations of the amount of benefits to be awarded
under Part B.” Id. at 678. As noted, Part B determinations
were delegated to private insurance carriers. However, the
Court concluded that “those matters which Congress did
not leave to be determined in a ‘fair hearing’ conducted by
the carrier — including challenges to the validity of the
Secretary’s instructions and regulations — are not impliedly
insulated from judicial review by . . . § 1395ff.”11 Id.
(emphasis in original).
The Court also rejected the government’s argument that
the third sentence of § 405(h), as interpreted by Salfi and
Ringer, barred federal question jurisdiction over the family
physicians’ challenge to the Secretary’s regulation. It wrote:
Section 405(h) does not apply on its own terms to Part
B or the Medicare program, but is instead incorporated
mutatis mutandis by § 1395ii. The legislative history of
both the statute establishing the Medicare program
and the 1972 amendments thereto provides specific
evidence of Congress’ intent to foreclose review only of
“amount determinations” — i.e., those “quite minor
matters” remitted finally and exclusively to
adjudication to private insurance carriers in a “fair
hearing.” By the same token, matters which Congress
did not delegate to private carriers, such as challenges
to the validity of the Secretary’s instructions and
regulations, are cognizable in courts of law.
Id. at 680 (citations omitted)(emphasis in original).
Accordingly, the Court held that § 405(h) did not prevent
the district court from having federal question jurisdiction
over the family physicians’ complaint.
11. The Court also noted that the Act’s exhaustion requirement could not
apply to the family physicians’ challenge to the regulation because “there
is no hearing, and thus no administrative remedy, to exhaust.” 476 U.S.
at 673 n.4.
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Michigan Academy created what came to be called the
“amount/methodology” distinction, under which pre-
enforcement challenges to the method by which Medicare
benefits were determined, rather than challenges to the
actual amount of the benefits, were not barred by § 405(h).
See John Aloysius Cogan, Jr., and Rodney A. Johnson,
Administrative Channeling Under the Medicare Act Clarified:
Illinois Council, Section 405(h), and the Application of
Congressional Intent, 9 Annals Health L. 125, 134 (2000).
However, four months after Michigan Academy, Congress
amended the Medicare Act to authorize administrative and
judicial review of Part B claims meeting certain amount-in-
controversy thresholds for services rendered on or after
January 1, 1987. The amendment therefore effectively gave
Part B claimants the same administrative and judicial
remedies Part A claimants had. Id. As a result of the
amendment, most courts considered Michigan Academy a
“dead letter,” and the “amount/methodology” distinction
was deemed to have been extinguished by Congress. Id.
(citations omitted).
This set the stage for the final case bearing on our
analysis, Shalala v. Illinois Council on Long Term Care, Inc.,
529 U.S. 1 (2000). In Illinois Council, an association of
nursing homes invoked the district court’s federal question
jurisdiction and sued the Secretary claiming that certain
Medicare health and safety regulations violated various
statutes as well as the Constitution. The district court
dismissed the suit for lack of jurisdiction, holding that “a
set of special statutory provisions creates a separate,
virtually exclusive, system of administrative and judicial
review of denials of Medicare claims; and it held that one of
those provisions [§ 405(h)] explicitly barred a § 1331 suit.”
529 U.S. at 5.
However, the court of appeals reversed and gave new life
to Michigan Academy. Illinois Council on Long Term Care,
Inc. v. Shalala, 143 F.3d 1072 (7th Cir. 1998). It found that
Michigan Academy modified Salfi and Ringer by limiting
their scope to amount determinations rather than pre-
enforcement challenges. Id. at 1075-1076 (“As the Court
read § 1395ii and therefore § 405(h) in Michigan Academy,
pre-enforcement review of a regulation’s validity is not an
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action to “recover on” a claim, even when per Salfi a
constitutional objection to the regulation is a “claim arising
under this subchapter.”).
The Supreme Court, however, reversed the court of
appeals. The Court held, putting Michigan Academy aside
for the moment, that § 405(h), as interpreted by Salfi and
Ringer, “would clearly bar this section 1331 lawsuit.” 529
U.S. at 11. It wrote:
Despite the urging of the Council and supporting amici,
we cannot distinguish Salfi and Ringer from the case
before us. Those cases themselves foreclose
distinctions based upon the “potential future” versus
the “actual present” nature of the claim, the “general
legal” versus the “fact-specific” nature of the challenge,
the “collateral” versus “noncollateral” nature of the
issues, or the “declaratory” versus “injunctive” nature
of the relief sought. Nor can we accept a distinction
that limits the scope of § 405(h) to claims for monetary
benefits. Claims for money, claims for other benefits,
claims for program eligibility, and claims that contest
a sanction or remedy may all similarly rest upon
individual fact-related circumstances, may all similarly
dispute agency policy determinations, or may all
similarly involve the application, interpretation, or
constitutionality of interrelated regulations or statutory
provisions. There is no reason to distinguish among
them in terms of the language or in terms of the
purposes of § 405(h). Section 1395ii’s blanket
incorporation of that provision into the Medicare Act as
a whole certainly contains no such distinction. Nor for
similar reasons can we here limit those provisions to
claims that involve “amounts.”
Id. at 13-14.
The Court also explained the rationale underlying
§ 405(h). At the outset, it conceded that “[t]he scope of the
italicized language ‘to recover on any claim arising under’
the Social Security (or, as incorporated through § 1395ii,
the Medicare) Act, is, if read alone, uncertain.” Id. at 10.
Nonetheless, the Court held that the meaning and import of
§ 405(h) are clear in light of Salfi and Ringer. It explained:
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[T]he bar of § 405(h) reaches beyond ordinary
administrative law principles of “ripeness” and
“exhaustion of administrative remedies” — doctrines
that in any event normally require channeling a legal
challenge through the agency.
Insofar as § 405(h) prevents application of the
“ripeness” and “exhaustion” exceptions, i.e., insofar as
it demands the “channeling” of virtually all legal attacks
through the agency, it assures the agency greater
opportunity to apply, interpret, or revise policies,
regulations, or statutes without possibly premature
interference by different individual courts applying
“ripeness” and “exhaustion” exceptions case by case.
But this assurance comes at a price, namely,
occasional individual, delay-related hardship. In the
context of a massive, complex health and safety
program such as Medicare, embodied in hundreds of
pages of often interrelated regulations, any of which
may become the subject of a legal challenge in any of
several different courts, paying this price may seem
justified. In any event, such was the judgment of
Congress as understood in Salfi and Ringer.
Id. at 12-13 (citations omitted) (emphasis added).
The Court then discussed whether Michigan Academy
somehow modified Salfi and Ringer. The Court held that
Michigan Academy did not modify Salfi and Ringer “by
limiting the scope of [§] 1395ii and therefore § 405(h) to
amount determinations.” Id. at 15 (internal quotations
omitted). The Court noted that Michigan Academy involved
a § 1331 challenge to regulations which, at the time, were
not administratively or judicially reviewable. Because no
administrative or judicial review of the regulations was
available, the Court in Michigan Academy allowed the
family physicians to mount a challenge directly in a court
of law under § 1331. Thus, the Court in Illinois Council
seemed to read Michigan Academy as creating an exception
to the channeling requirement of § 405(h) in those cases
where no judicial review is available at all. Id. at 19 (“[I]t is
more plausible to read Michigan Academy as holding that
§ 1395ii does not apply § 405(h) where application of
§ 405(h) would not simply channel review through the
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agency, but would mean no review at all.”) (emphasis in
original).12
Our discussion of these four cases leads us back to the
question of whether the district court had federal question
jurisdiction over Fanning’s amended class action complaint
seeking to enjoin the government’s attempt to obtain
reimbursement of Medicare overpayments pursuant to the
secondary payer provisions of the MSP. We believe that
Salfi, Ringer and Illinois Council compel the conclusion that
the district court had no federal question jurisdiction.
The essence of the claim asserted in Fanning’s amended
class action complaint is that the government is not
entitled to recover Medicare overpayments from a fund
created as a result of a settlement with an alleged tortfeasor
because Congress never intended to treat a settlement trust
fund as payments from a primary insurer under the MSP.
We believe there may be force to Fanning’s argument.
However, the government’s basis for seeking MSP
reimbursement from the AcroMed settlement trust fund is
that AcroMed is a “self-insured plan” and is, therefore the
primary payer under the MSP. Accordingly, the claim
asserted in the amended class action complaint is wholly
dependent upon determining whether or not AcroMed is a
“self-insured plan” and, therefore, a “primary plan” under
the MSP.13 It is thus apparent that both the standing and
12. In Illinois Council, the Court noted that § 405(h) “demands the
‘channeling’ of virtually all legal attacks through the agency.” 529 U.S.
at 13. Since Illinois Council limited Michigan Academy to those instances
were there was no review available at all, we assume that the Court’s use
of the phrase “virtually all legal attacks” is a specific reference to
Michigan Academy.
13. As noted, the statutory definition of “primary plan” includes plans
that are self-insured. 42 U.S.C. § 1395y(b)(2) (“the term ‘primary plan’
means . . . a workmen’s compensation law or plan, an automobile or
liability policy or plan (including a self-insured plan) or no fault
insurance.”). Under the regulations, a “plan” is defined as “any
arrangement, oral or written, by one or more entities, to provide health
benefits or medical care or assume legal liability for injury or illness.” 42
C.F.R. § 411.21. The term “self-insured plan” is defined as a “plan under
which an individual, or a private or governmental entity, carries its own
risk instead of taking out insurance with a carrier.” 42 U.S.C.
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the substantive basis for the claim asserted in the amended
class action complaint are rooted in, and derived from, the
Medicare Act. Consequently, the claim is one “arising
under” the Medicare Act and the third sentence of § 405(h)
therefore deprived the district court of federal question
jurisdiction. The AcroMed class settlement plaintiffs are
thus required by § 405(h), as interpreted by Salfi, Ringer
and Illinois Council, to channel their claim through the
agency.
Of course, the AcroMed class settlement plaintiffs would
not have to channel their claim through the agency if they
could avail themselves of the Michigan Academy exception.
That is to say, channeling would not be required if they
could show that they have no way of having their claims
reviewed. To that end, they do claim that there is no
administrative review of the agency’s demand for MSP
reimbursement. Therefore, they argue that a suit filed
under the district court’s federal question jurisdiction is the
only avenue available to challenge the agency’s
reimbursement demand.
However, the class members’ assertion of no
administrative review of the agency’s demand for MSP
reimbursement is plainly wrong. The letters sent to the
approximately 1,800 settlement class members clearly
advised them of the administrative process by which they
could appeal the agency’s determination or, in the
alternative, seek a waiver of Medicare’s claim for
reimbursement.14 More importantly, the Medicare Manual
§ 411.50(b)(2). A “self-insured plan” includes an “entity engaged in a
business, trade or profession.” Id.
Although it has no bearing on our decision, we note that the
government’s argument that a “self-insured plan” includes a fund
created by a tortfeasor to settle litigation has engendered a circuit split.
The Fifth Circuit, in Thompson v. Goetzmann, 315 F.3d 457, 470 & n.65
(5th Cir. 2002), opinion withdrawn and reissued as amended on other
grounds, 337 F.3d 489 (5th Cir. 2003), rejected the government’s
argument, while the Eleventh Circuit, in United States v. Baxter Intern.,
Inc., ___ F.3d ___, 2003 WL 22120071 (11th Cir. Sept. 15, 2003),
accepted it.
14. The Medicare beneficiary may ask the Secretary to waive recovery in
full or in part. The Secretary may waive recovery when the beneficiary
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sets out, at length, the “procedures to be used in
processing appeals of MSP liability overpayment and waiver
determinations.” Medicare Intermediary Manual, Part 3,
§ 3419.15 Therefore, the Michigan Academy exception is not
available to the AcroMed settlement class members.
In a further attempt to establish jurisdiction, the
AcroMed class settlement members argue that § 405(h) does
not apply because their complaint seeks neither a benefit
determination nor a review of benefit determinations, but is
instead a challenge to the right of Medicare to seek
reimbursement of alleged overpayments from a trust fund
created as a result of a settlement with a tortfeasor. We
agree with that characterization of the class members’
claim. However, under Salfi, Ringer and Illinois Council, that
distinction is irrelevant. The appropriate inquiry is whether
the Medicare Act provides both the standing and the
substantive basis for their contentions. Clearly it does,
because the dispositive issue is whether AcroMed is a “self-
insured plan” within the meaning of the MSP.16
The AcroMed class settlement plaintiffs next argue that
the agency’s demand letters to them is final agency action
was not at fault and recovery would defeat the purposes of the Medicare
Act or be against equity or good conscience. See 42 U.S.C. § 1395gg(c).
The regulations explain that the purposes of the Medicare Act would be
defeated if recovery would deprive a person of income required for
ordinary and necessary living expenses, including medical expenses. See
42 C.F.R. § 405.358; 20 C.F.R. § 404.508(a). The Secretary’s waiver
determination is subject to administrative and judicial review. See 42
U.S.C. § 1395ff(b)(1); 42 C.F.R. §§ 405.704(b)(14), 405.720-730.
15. The pertinent Manual provisions are available at http://
cms.hhs.gov/manuals/13_int/a3toc.asp.
16. Moreover, we note, but do not decide, that a reasonable argument
can be made that the AcroMed class settlement members are in fact
seeking benefits. As the government says: “[P]laintiffs do seek benefits:
they are effectively seeking to require that Medicare make primary,
rather than secondary, payment for medical expenses related to their
settlement with AcroMed.” Government’s Br. at 25. In addition, one court
of appeals has held that a Medicare beneficiary’s “claim that she is
entitled to the overpayment is, in essence, one for medicare benefits.”
Buckner v. Heckler, 804 F.2d 258, 260 (4th Cir. 1986).
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from which they can seek judicial review. However, that
argument is without merit. The demand letters, although
harsh in their terms and probably unsettling to their
recipients, advised the class settlement plaintiffs of their
administrative review rights. Therefore, it is difficult to
define them as final, rather than initial, agency action.17
17. We are not unsympathetic to the class settlement counsel’s
consternation over the wording of the 1800 letters the government sent
out. Counsel claims that the language of the letters was intended more
to terrify than to inform, and that, to the extent they may have served
to inform, they succeeded only in misinforming large numbers of the
class because the amounts stated in the letters were frequently
erroneous. Although there has been no finding about the accuracy of the
amounts the government requested in those letters, we agree that the
wording of the letters was unnecessarily callous and threatening. A
typical example of one of these letters read as follows:
You must pay this amount ($11,833.44) within sixty (60) days of
the date of this letter (by July 9, 2001). Please send a check or
money order . . . .
If you do not pay this amount by July 9, 2001, you will be
required to pay interest from the date of this letter. Interest will be
calculated at the rate of 13.75% per annum in accordance with 42
C.F.R. 411.24(m). Interest will continue to accrue until the debt is
paid, whether or not a waiver of recovery request or appeal is
pending.
If you do not pay this amount, the Medicare program may recover
the amount from any Social Security or Railroad Retirement benefits
to which you might otherwise be entitled, or the money may be
recouped from payments Medicare would otherwise pay you. Also,
please be aware that Medicare must refer delinquent debts to the
Department of Treasury for offset against Federal payments that
may be due or for other appropriate collection actions.
JA 98 (emphasis in original).
Although this language did inform class members, it no doubt did
much more; it had to have coerced and frightened them as well. In fact,
the coercive nature of this letter explains why one court referred to the
government’s “heavy-handed collection” tactics under the MSP. In Re
Dow Corning Corp., 250 B.R. 298, 336 (Bankr. E.D. Mich. 2000). See
also Waters v. Farmers Texas County Mut. Ins. Co., 9 F.3d 397, 400-01
(5th Cir. 1993) (expressing disappointment with “the government’s
overreaching interpretation of its authority under the [MSP].”).
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Moreover, even if we assume arguendo that the letter was
final agency action, judicial review of that final action is
available only through § 405(g). Under the Medicare Act,
there is no judicial review of final agency action under the
district court’s federal question jurisdiction.18 Ringer, 466
U.S. at 614-615 (“The third sentence of 42 U.S.C. § 405(h),
made applicable to the Medicare Act by 424 U.S.C. § 1395ii,
provides that § 405(g), to the exclusion of 28 U.S.C. § 1331,
is the sole avenue for judicial review for all “claim[s] arising
under” the Medicare Act.”) (emphasis added).
III. CONCLUSION
Thus, for the reasons set forth above, we find the
AcroMed settlement class plaintiffs’ claim that the
government cannot seek MSP reimbursement from the
settlement trust fund established by AcroMed is a “claim
arising under” the Medicare Act. Therefore, Section 405(h)
of the Social Security Act, made applicable to the Medicare
Act by 42 U.S.C. § 1395ii, precluded the district court from
having federal question jurisdiction over Fanning’s
amended class action complaint. Consequently, we will
reverse the district court and remand with instruction to
dismiss the amended class action complaint.
Although counsel for appellees here engages in some hyperbole in
referring to the government’s actions as “the apogee of a heavy-handed,
coercive, neo-Stalinist approach,” counsel’s outrage over the threatening
tone of the letters is not totally unjustified. See Appellee’s Br. at 27.
Although we would not go so far as to agree that these letters were “neo-
Stalinist” tactics, they are more suggestive of tactics one might attribute
to a less than reputable collection agency rather than to one’s own
government.
18. The AcroMed settlement class plaintiffs also argue that the district
court had jurisdiction to review final agency action under the judicial
review provision of the Administrative Procedure Act, 5 U.S.C. § 706.
However, that “provision is not an independent grant of subject-matter
jurisdiction.” Your Home Visiting Nurse Services, Inc. v. Shalala, 525 U.S.
449,457-58 (1999) (citing Califano v. Sanders, 430 U.S. 99, 97 (1977)).
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A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
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