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Department of Health and Human Services
Medicare Appeals Council
Key Largo Medical Systems Inc., et al

Supplementary Medical Insurance Benefits  



Blue Cross/Blue Shield of South Carolina

(Docket Number)

This is the second adjudicative action taken by the Medicare Appeals Council in the above-captioned case. On December 18, 1997, we vacated a May 13, 1996 decision issued by Administrative Law Judge Marilyn W. Carney (now retired) and remanded the case for further proceedings. The Social Security Administration's Office of Hearings and Appeals assigned the case on remand to Administrative Law Judge Robert S. Habermann. On May 22, 2000, Judge Habermann issued a decision concerning the claims of six of the seven original appellants. (1) Judge Habermann's decision was captioned as fully favorable to the appellants.

In a memorandum dated June 29, 2000, the Health Care Financing Administration (2) referred the case to us for possible own motion review. By notice dated July 21, 2000, we notified the parties that we had decided to review Judge Habermann=s decision under the own motion authority contained in 20 CFR 404.969.

The extensive proceedings that preceded our December 18, 1997 remand order are summarized in that order and on pages 1 through 3 of Judge Habermann=s decision. We hereby incorporate those descriptions by reference and proceed to the matters that were before Judge Habermann pursuant to our December 18, 1997 remand order.

Summary of the Results of the Council=s Review

We decided to take own motion review of this case for several reasons. First, we determined that review was necessary to consider whether Judge Habermann erred in reversing Judge Carney=s decision on carrier jurisdiction, which we had affirmed in our remand order. Second, it was necessary to determine whether Judge Habermann had resolved all of the remaining issues we had identified in our order. Third, in light of the assertions in the referral memorandum, we decided to review Judge Habermann=s findings concerning the appropriate coding for the supplies at issue, which was a question that had not been specifically addressed in Judge Carney=s decision or our remand order.

After thoroughly considering the voluminous record in this case and the additional material and arguments that appellants= have submitted to us, we have reached three general conclusions in this case. First, we have concluded that although our remand order did not preclude Judge Habermann from revisiting the carrier jurisdiction issue, his findings and conclusions with respect to this issue are based on an error of law and are not supported by substantial evidence. Second, although we find that the hearing decision adequately resolves the issue of whether the flushing and irrigation supplies (hereafter: Aflushing/irrigation supplies@) provided by the appellants were covered under the Medicare program, it does not evaluate or make findings on whether the site care supplies also met Medicare coverage requirements.

Moreover, none of the oral proceedings conducted on remand, written submissions by the appellants or others, or the hearing decision itself indicate that the Administrative Law Judge has resolved other properly appealed claims identified in our remand order that did not pertain to patients receiving parental or enteral nutrition (PEN) or who did not have gastrostomies. (3) Finally, we have concluded that Judge Habermann=s findings on the coding issue cannot be sustained because his conclusions are not based on evidence adduced at the hearing, as required by section 205(b)(1) of the Social Security Act (Athe Act@). Moreover, although Judge Habermann made findings concerning how the claims for flushing/irrigation supplies were to be reimbursed, he did not give any direction concerning reimbursement for the site care supplies.

For numerous reasons, including the already lengthy proceedings in this case, we have determined that remanding this case a second time would not be appropriate or fruitful. Accordingly, we have decided to resolve the above matters as follows.

I. Contractor Jurisdiction

For the reasons explained below, we find: 1) that to the extent that the claims at issue involved items furnished to beneficiaries who were receiving parenteral or enteral nutrition (hereafter: "PEN"), those claims were subject to the South Carolina PEN carrier's jurisdiction (4); and 2) that the transfer of the claims submitted to the local carriers did not constitute an impermissible, retroactive change in local policy, but a correction to comply with national policy, which the local contractors were required to follow.


As explained in both Administrative Law Judge decisions and our December 1997 remand order, the dispute over the claims at issue began with an agency decision to transfer the appellants' claims from two local carriers, Blue Cross and Blue Shield of Florida (BCBS-FL) and Pennsylvania Blue Shield (PBS), to BCBS-SC. One of the primary issues considered during the proceedings in federal district court and, subsequently, before agency adjudicators has been whether the local carriers or the PEN carrier, BCBS-SC, had jurisdiction to adjudicate the claims. In order to resolve this question, considerable effort has been made to obtain written documents and oral testimony that would demonstrate the carriers' (both local and PEN) understanding of their respective jurisdictions. However, less attention has been paid to determining how carrier jurisdiction is actually established and the agency's statements or policies about the carriers' respective authorities concerning the claims at issue. Accordingly, we first discuss how carrier jurisdiction is established and consider the agency documents that established and explained the jurisdictions at issue in this case.

Section 1842 of the Social Security Act ("the Act") establishes the authority under which HCFA may delegate to carriers the responsibility for reviewing Part B claims. Section 1842(a) of the Act states that, to provide for the administration of Medicare benefits, "the Secretary is authorized to enter into contracts with carriers" to perform a variety of functions, including making determinations of the amounts of payments required and to "serve as a channel of communication of information relating to the administration of [Part B]."

In addition, sections 1834(a)(12)and 1834(h)(3) of the Act authorize the Secretary to designate one carrier for one or more entire regions to process all claims within the region for covered durable medical equipment (DME), orthotics and prosthetics, as those terms are defined in the statutory subsections. Sections 1834(a)(12) and (a)(13) of the Act were enacted in section 4062 of OBRA of 1987 (P.L. 100-203). (5)

On November 6, 1991, the Secretary and the HCFA Administrator issued a proposed rule designating regional carriers that would process claims for DME, prosthetics, orthotics, and supplies (DMEPOS), relying on sections 1834(a)(12), concerning DME, and 1834(h)(3), concerning prosthetic devices, prosthetics and orthotics. 56 Fed. Reg. 56612, 56613 (November 6, 1991). In addition, the regulations proposed to include PEN claims within the jurisdiction of the new carriers, relying on sections 1102, 1842, and 1874(a) of the Act. (6) Id., at 56615. A final rule establishing the new regional carriers was published on June 18, 1992, with an effective date of August 17, 1992. See 57 Fed. Reg. 27290 (June 18, 1992).

The proposed rule contains a detailed discussion of the latitude given to the Department, and, more particularly HCFA, to delineate a carrier's jurisdiction, as well as the factors the agency considers when it establishes or alters that jurisdiction. First, the proposed rule noted that section 1842 "does not place any restriction on the area which any carrier must serve." Id. Consequently, HCFA historically had contracted with carriers to process claims in areas that were multi-State, State-Wide, and lesser areas. The preamble continued: "HCFA may restrict the types of claims each of these carriers must process, i.e., all carriers need not process the full range of claims." Id.

As noted in the proposed rule, in 1991 and 1992, Part B claims were allocated among 34 carriers on a number of different bases. Generally, claims for medical care items, including DME and prosthetics, were allocated to carriers within whose areas the point of sale of the item occurred. "The only items allocated under different claims jurisdiction theories are claims for parenteral and enteral nutrients, supplies and equipment, which are currently allocated between two specialty carriers on the basis of the location of the home office of the supplier, and claims for electronic bone growth stimulators..." Id.

HCFA explained in the 1991 proposed rule that the decision to reconfigure carrier jurisdiction over DMEPOS claims stemmed from numerous, unintended consequences of the point of sale rule:

Gradually, some suppliers realized that, because of variations between localities, the amount paid for an item differed from carrier to carrier. They also noted that interpretation of coverage rules, generally accepted local medical practices and individual carrier utilization screens similarly differed. For example, an item for which a supplier could, without additional documentation, be paid without limit at one carrier might be approved only for a limited quantity, or only upon submission of additional medical justification, at another carrier.

Id. at 56614-15. The proposed rule goes on to list a number of complaints the agency had received during preceding years about "perceived incorrect payments by Medicare for DMEPOS claims." The rule references, inter alia, that carriers with "higher reimbursement amounts or more generous utilization parameters for common supply items, such as catheters, surgical dressings, etc." had complained that some suppliers were "fragmenting charges, billing for excessive amounts of supplies and violating carrier jurisdiction policies...." Id. at 56615.

The above-cited regulations articulate the Secretary's position that carrier jurisdiction, including the creation of specialty carriers, is established by HCFA under the authority of sections 1102, 1842 and 1874(a) of the Act. We note, however, that at the time the jurisdictional dispute in this case arose, the regulations governing intermediaries and carriers, located at 42 CFR Part 421, did not contain specific provisions concerning carrier jurisdiction over particular types of claims. Rather, the special PEN carriers had been established under authority of a September 1984, "Part A/B Intermediary Letter 84-13/84-8." The instruction stated that two specialty carriers would handle all Medicare Part B parenteral and enteral (P/E) therapy claims, effective October 1, 1984. Jurisdiction for processing claims would be based on the suppliers' home office addresses; claims with a home office east of the Mississippi would be processed by BCBS-SC. [ALJ Ex. 13-Deposition of Jane Herlocker, deposition exhibit 4.] (7)

The instruction also addressed the concern that claims might be improperly submitted to local carriers:

To ensure that any Part B P/E claims which are misrouted to contractors other than the specialty carriers are properly directed to and processed by either Occidental [the PEN carrier for claims west of the Mississippi] or BCBS-SC, the attached HCFA Common Procedure Coding System (HCPCS) codes assigned to P/E services are to be implemented by all contractors as a processing system screening mechanism. These HCPCS codes will be included in the 1985 HCPCS which will be released this fall. The attached codes will also serve to screen out P/E services on claims which reflect both P/E and non-P/E services (though we project this volume to be minimal.) In these instances, the non-P/E services would be processed by the "home" carrier and the P/E services would be denied with a notation on the Explanation of Medicare Benefits (EOMB) to send the P/E services on a separate claim to the appropriate specialty carrier. If a misrouted P/E claim inadvertently enters a contractor's system, the implementation of the attached HCPCS codes would serve to screen out these services and alleviate potential processing errors including duplicate payments.

At the end of the instruction, contractors were advised to direct any questions to their HCFA regional office.

In addition to this nationally applicable directive, HCFA published instructions concerning PEN coverage and PEN carrier jurisdiction in the Medicare Coverage Issues Manual (MCIM) and the Medicare Carriers Manual (MCM). National Coverage Determination (NCD) 65-10, which is still in effect, provided, in pertinent part, as follows:

Enteral and Parenteral Nutritional Therapy Covered as Prosthetic Device, (Effective for items and services furnished on or after 7/11/84)

If the coverage requirements for enteral or parenteral nutritional therapy are met under the prosthetic device benefit provision, related supplies, equipment and nutrients are also covered under the conditions in the following paragraphs and Intermediary Manual, §3110.4.

[Section 65-10.1, pertaining to parenteral nutrition, omitted.]

65-10.2 Enteral Nutrition Therapy.--Enteral nutrition is considered reasonable and necessary for a patient with a functioning gastrointestinal tract who, due to pathology to or nonfunctioning of the structures that normally permit food to reach the digestive tract, cannot maintain weight and strength commensurate with his or her general condition. Enteral therapy may be given by nasogastric, jejunostomy, or gastrostomy tubes ....

Typical examples of conditions that qualify for coverage are head and neck cancer with reconstructive surgery and central nervous system disease leading to interference with the neuromuscular mechanisms of ingestion of such severity that the beneficiary cannot be maintained with oral feeding. However, for Part B coverage of enteral nutrition therapy for these and any other conditions must be approved on an individual, case-by-case basis. Each claim must contain a physician's written order or prescription and sufficient medical documentation (e.g., hospital records, clinical findings from the attending physician) to permit an independent conclusion that the patient's condition meets the requirements of the prosthetic device benefit and that enteral nutrition therapy is medically necessary.

(Emphasis added.)

Further, section 3116 of the MCM (rev. 4/92) read:

There are two PEN specialty carriers. Each carrier's claims jurisdiction is determined by the PEN supplier's "Home Office" location. ... The eastern PEN carrier processes all claims from PEN suppliers with authorized PEN identification numbers that are located each [sic] of the Mississippi River.

In addition, section 3110.4 of the Medicare Intermediary Manual, referenced in the NCD and also reproduced at section 2130 of the MCM, provided:

Prosthetic Devices.--Prosthetic devices (other than dental) which replace all or part of an internal body organ (including contiguous tissue) or replace all or part of the function of a permanently inoperative or malfunctioning internal body organ are covered when furnished on a physician's order......

Colostomy (and other ostomy) bags and necessary accoutrements required for attachment are covered as prosthetic devices. This coverage also includes irrigation and flushing equipment and other items and supplies directly related to ostomy care, regardless of whether the attachment of a bag is required.

Accessories and/or supplies which are used directly with an enteral or parenteral device in order to achieve the therapeutic benefit of the prosthesis or to assure the proper functioning of the device are covered under the prosthetic device benefit, subject to the additional guidelines in the Coverage Issues Manual, §§65-10 - 65-10.3. Covered items include catheters, filters, extension tubing, infusion bottles, pumps ..., needles, syringes, dressings, tape,... and parenteral and enteral nutrient solutions.... Although coverage of the enteral nutrition (EN) and total parenteral nutrient (TPN) systems is provided on the basis of the prosthetic device benefit, the payment rules relating to rental or purchase of DME apply to such items. (see §3113.) ....

(Emphasis added.)

In addition, the PEN Supplier's Guide to Medicare, issued in January 1989 (8) stated:

If the coverage requirements for enteral or parenteral nutritional therapy are met under the prosthetic device benefit provision, related medically necessary supplies, equipment and nutrients are also covered.

(Emphasis added.)

Finally, in discussing PEN coverage requirements, MCM section 3329 D.3 provided in pertinent part:

Supplies-Enteral care kits contain all the necessary supplies (excluding the tubing) for the enteral patient using the syringe, gravity, or pump method of nutrient administration.....

PEN care kits and their components are considered all-inclusive items necessary to administer therapy during a monthly period. Since the nutrition care kits contain all-inclusive items needed to administer therapy, deny payment for additional components included as part of the PEN supply kit.

(Emphasis added.) (9)

During the proceedings in the district court and before the Administrative Law Judges, witnesses and appellants' counsel have offered various interpretations of the language highlighted above, particularly to the terms "related supplies" and "necessary to administer therapy.". The agency's position is that the two phrases include not only supplies used while PEN nutrients are being given to the patient, but also the flushing/irrigation and site care supplies provided by the suppliers in this case. Appellants' position is that the supplies referenced in the NCD and manual sections are limited to the supplies used while PEN nutrients are being given to the patient. They also appear to assert that the second paragraph of 3110.4 referenced above is essentially a separate coverage provision for their supplies under the prosthetic device benefit, distinct from the PEN benefit described in 65-10 and the third paragraph of section 3110.4.

We believe that the agency's interpretation of NCD 65-10 and the other manual sections cited above is not only the most reasonable interpretation of the above authorities, but the most consistent with the parameters of the prosthetic device benefit. It is a maxim of the Medicare program that Medicare only pays for items and services in designated benefit categories; in other words, not every medically necessary service is covered by Medicare. Both the agency and appellants agree that in the circumstances in which HCFA contractors have properly paid for the types of supplies that the appellants furnished in this case, they were paid under the prosthetic device benefit. However, the syringes, wipes, adhesive tape, and sterile water provided by the appellants are not, in themselves, prostheses. Rather, they maintain and facilitate the use of the gastrostomy, which, in turn, allows the patient to receive the enteral nutrition. Unless the patient's condition meets the requirements of NCD 65-10, none of the nutrients or other related supplies are covered under the Medicare program. We conclude, therefore, that the agency's interpretation of what encompasses "related supplies" and "necessary to administer therapy" is the most consistent with both the language of the NCD and basic Medicare coverage rules. (10)

Moreover, in our remand order we pointed to another agency document not discussed by Judge Habermann that was issued after the issuance of the NCD. It documents the agency's decision to include the supplies at issue with the PEN carrier's jurisdiction. In September 1991, HCFA's Associate Regional Administrator for Region IV issued a letter to all Region IV. carriers entitled "Surgical Dressing Kits for Patients who use Gastrostomy Tubes for their Enteral Feedings-INFORMATIONAL." [ALJ Ex. 19B, page 7.] The letter stated, in pertinent part:

It has come to our attention that some carriers may be paying for gastrostomy supply kits for those patients undergoing enteral nutritional therapy. This kit would be most likely billed by the supplier using the surgical supply code A4649.

Claims for surgical dressing kits for enteral patients should only be processed by the PEN specialty carriers. Both specialty carriers agree that the surgical care kits are covered. However, since the enteral supply kits are defined as containing all supplies necessary for the administration of enteral feedings, they consider that wound care items are already included in those kits. Since almost all patients obtain enteral supply kits and Medicare is billed for those kits, there will usually be no additional allowance available for surgical supply kits.

Notwithstanding that the national issuances directed that PEN related supplies, included irrigation/flushing and site care supplies, should be submitted to the specialty carriers, it is undisputed that the local carriers in this case published inconsistent statements concerning this question. We note, however, that prior to the period in dispute, the local carrier issuances appear wholly consistent with HCFA directives. For example, a December 1987 BCBS-FL update (ALJ Exhibit 19A, p.4) contained a reminder that "all Medicare Part B claims for ... enteral nutritional therapy supplies are processed by [BOBS-SC]." A March 28, 1988 Florida Policy Bulletin (ALJ Exhibit 19A, p.5) stated that "Parenteral and enteral nutrition systems are eligible under the prosthetic device benefit" and described the coverage criteria for enteral nutrition via gastrostomy tube. The bulletin stated that "payment may be made for accessories and/or supplies that are used directly with ... enteral systems to achieve therapeutic benefit or assure proper functioning of the feeding systems." [Emphasis added.] Such accessories, the bulletin explained, included dressings and tape. The bulletin stated that only the two PEN carriers would process "all Part B claims for ... enteral nutritional supplies," effective December 1, 1984.

Additionally, the record contains a special bulletin issued by Pennsylvania Blue Shield, dated February 1991, (11) which reads:

HCFA has recently clarified that enteral supply kits contain all supplies necessary for the administration of enteral feedings. This includes surgical dressings for enteral patients who use gastrostomy tubes for their enteral feedings. Therefore, no additional allowance will be made for a surgical supply kit provided to a patient who has previously obtained an enteral supply kit.

All claims for surgical dressing kits provided for the administration of enteral therapy should be processed by the parenteral and enteral nutrient (PEN) carrier....

Claims for surgical dressing kits provided for reasons other than the administration of enteral therapy should be submitted to Pennsylvania Blue Shield. For example, claims for surgical dressing kits provided to an enteral patient who requires the dressings because of the debridement of an ulcer would be submitted to Pennsylvania Blue Shield .... (12)

We also recognize, however, as did Judges Carney and Habermann, that other issuances of the local carriers, including a January 1991 Florida "specialty update," (13) a January-February 1991 "Medicare Part B Update," (14) a April 1991 update (15) and a October 19, 1992 PBS letter (16) contained ambiguities and conflicting representations concerning the local carriers' authority to process gastrostomy supply claims. (17) The record also demonstrates that the PEN supplier lacked procedures for processing the types of claims at issue. Rather, the specialty carrier maintained that all necessary gastrostomy dressings and maintenance supplies, including site care and flushing supplies, would be included in the PEN administration kit. (As noted above, MCM section 3329. D.3 provided that "enteral care kits contain all the necessary supplies (excluding the tubing) for the enteral patient using the syringe, gravity or pump method of nutrient administration." In addition, a December 1990/January 1991 South Carolina Medicare Advisory [ALJ Ex. 10, Robertson Deposition, deposition exhibit 13) read:

Enteral supply kits should contain all items necessary to administer therapy for one month. Additional [illegible] required during the month for enteral care are included in the enteral supply kit reimbursement. We do not reimburse items necessary for gastrostomy care, including dressings separately. The allowance for enteral supply kits will not be modified to include additional dressings.

Accordingly, the PEN carrier had no procedures for processing claims for separate components of the kit.

In our previous order, we affirmed Judge Carney's finding that the PEN carrier had jurisdiction over the claims for the supplies at issue that were furnished to PEN beneficiaries to maintain and help the gastrostomy achieve its therapeutic effect. We concluded that the HCFA directives, original local carrier issuances, and subsequent clarifications supported that conclusion. In so doing, however, we did not minimize the confusion caused by the more recent contractor issuances and communications. (18) Moreover, we did not explicitly prohibit the Administrative Law Judge from revisiting the jurisdictional issue on remand.

During the proceedings before Judge Habermann, Bruce Carter, a witness for the PEN carrier, stated that he had prepared for the hearing by communicating with Robin Robertson Spires, one of the agency's deponents during the district court proceedings. In response to a question by appellant's counsel, Mr. Carter produced an e-mail from Ms. Spires responding to various questions Mr. Carter had asked her in preparation for the hearing. [ALJ Ex. 61]. In her e-mail response, Ms. Spires stated that the HCFA attorney who represented the agency in the district court proceedings did not allow her to testify concerning her true views on the jurisdictional issue, including her belief that "no one with the PEN contract ever believed "A" code suppliers were our jurisdiction." In part because of the introduction of this evidence, Judge Habermann decided to reconsider the jurisdictional finding made by Judge Carney. [See Habermann decision at pp. 26-33]. He subsequently concluded that "the local carriers have the jurisdiction and the responsibility to process the claims at issue in this matter during the time period at question." [Habermann dec. at 41].

In reaching this conclusion, Judge Habermann focused primarily on the carriers' articulation of their respective jurisdictions and, in particular, on the more recent carrier issuances that were the most inarticulate and confusing. He ultimately resolved the jurisdiction question by applying the common law principle of contra proferentum as follows:

[I]f a contract or other written document is ambiguous giving rise to two possible interpretations, both of which are reasonable;[sic] the adjudicator should construe the provision(s) against the person or entity who selected the language or drafted the document(s). Since the interpretations articulated by the Appellant and the carriers concerning the coverage and claim filing provisions issued in the Medicare Updates, prior to October 1992, can both be considered to be reasonable, I will construe and interpret these coverage and claim filing policy statements in the light most favorable to the supplier.

The Council finds that the above analysis is insufficient to establish that the local carriers, and not the PEN carrier, had jurisdiction over the majority of the claims at issue. Any analysis of this issue must first determine the source of the carrier's authority to adjudicate these claims, and any pronouncements from that source on the issue. As shown above, HCFA has been given the authority to establish and restrict a carrier's jurisdiction and has exercised that authority in various publications, including, ultimately, a regulation. Second, HCFA, through its regional office, notified carriers that certain suppliers were misdirecting claims for enteral-related supplies and instructed the carriers to correct their processing. That some contractors did not heed or understand these instructions does not give them jurisdiction over claims that should have been directed to another carrier. (19)

Moreover, we find that the common law principle of contra proferentum, whether applied to HCFA's communications or the carriers' issuances, provides no guidance in this case. Contra proferentum is a rule applied to construction of contracts; the hearing decision cites no authority for applying it in the context of this case. See Restatement (2d) of Contracts § 206 (1979). Moreover, even if this case involved a contract between the suppliers and HCFA, it is unlikely that a court would construe any ambiguities against the agency in interpreting the agency's regulations and instructions. See, e.g., Commonwealth Edison Co. v. U.S. Depart. of Energy, 877 F.2d 1042 (D.C. Cir. 1989)(doctrine of contra proferentum inapplicable in regulatory context).

In his evaluation of the jurisdiction question, the Administrative Law Judge also relied on the contents of a draft letter, referred to as "Exhibit 22," which was first introduced in this case during discovery in the proceedings before the federal district court. [See ALJ Ex. 12, Herlocker deposition, deposition exhibit 5, hereafter referred to as "the Cusick letter."] According to the deposition testimony, this draft letter, which was from Elizabeth Cusick, HCFA's Director of the Office of Program Operations, and addressed to Irwin Cohen, one of the appellants' counsel, was never issued. In our December 1997 remand order, we had directed the Administrative Law Judge to rule on appellants' objections to the admission of this letter, because they had never received it. In considering this question on remand, Judge Habermann wrote:

[Appellants' counsel] noted that there was no objection to Exhibit 22 being admitted into the record as long as it was not admitted as proof or [sic] notice because the letter was never actually mailed. Rather he insisted that it should only to [sic] be admitted as proof of what HCFA's position was at the time the letter was drafted. [ALJ dec., page 11]

In his decision, Judge Habermann concluded that the Cusick letter contained "admissions" by HCFA that BCBS-FL should have paid for all of the claims at issue in this case, because the claims were submitted to that carrier prior to the date the appellants received actual notice of the "change in carrier jurisdiction." [ALJ dec. at 30.] Regardless of how the letter may be interpreted, we have determined that it cannot be considered as an official statement of agency policy, because there is no evidence that it was ever issued. [ALJ Ex. 13, Herlocker deposition, pages 88-95.]

Accordingly, the Council reverses the ALJ on this issue and finds that the PEN carrier had jurisdiction over the claims for gastrostomy supplies provided to PEN beneficiaries by the six appellants during the period at issue.

II. Coverage

Resolving which carrier had jurisdiction over the claims at issue does not, in itself, resolve whether the supplies at issue were covered under the Medicare program. The PEN carrier denied many, if not all, of the flushing/irrigation and site care supplies because it considered the supplies duplicative of items that had been furnished in enteral supply kits furnished by other suppliers. This general finding was not based on a comparison of the items actually provided and billed by both suppliers, but on the general conclusion contained in section 3329D.3 of the MCM that the enteral supply kit contained all items that the PEN patient needed.

In her decision of May 13, 1996, Judge Carney addressed BCBS-SC's determinations that the items furnished were duplicative of supplies previously furnished the beneficiaries in PEN administration kits. She wrote that BCBS-SC could not identify the contents of the kits; accordingly, they could not claim that the Appellants' supplies were duplicative. "Thus," she wrote, "BCBS/SC's denial of payment on this basis is invalid."

In our remand order of December 18, 1997, we indicated that Judge Carney's findings on the above issue were supported by the record. We found the HCFA and PEN carrier issuances concerning the all-inclusiveness of the PEN supply kits unpersuasive because:

[Those] issuances do not make clear that flushing and site care supplies are furnished with every PEN administration kit. To the contrary, the testimony and evidence support the conclusion that not every beneficiary required site care and/or flushing supplies, and that under program policy, the kits were supposed to be tailored to meet the specific needs of each beneficiary. In these cases, however, there was no primary evidence entered into the record to show that the physicians who had ordered the PEN and the accompanying PEN administration kits had directed that the kits be tailored to meet the needs of each beneficiary or that site care and/or flushing supplies had in fact been furnished to the beneficiaries through the "regular" PEN administration kits (hereafter: "PEN supply kits"). Accordingly, the record to date supports the Administrative Law Judge's conclusion with respect to the duplicative issue.

No additional evidence contradicting the above conclusion was introduced on remand. Similar to the reasoning given by Judge Carney and the Council, Judge Habermann concluded that the supplies at issue could not legitimately be denied on the basis that they duplicated items provided in the kits furnished with the PEN nutrients. We sustain Judge Habermann's conclusion on the above issue without further discussion.

We note, however, that Judge Habermann's decision did not completely resolve the other issues discussed in our remand order. First, he did not undertake much of the specific development we ordered to determine not only whether the items supplied by the appellants met general, categorical coverage requirements, but also whether the individual claims included in this appeal met those general requirements. Second, he did not consider how to dispose of certain claims, identified in our order, that did not appear to pertain to beneficiaries with gastrostomies. (20) Third, and most importantly, he only evaluated and made findings on one of the two general categories of supplies at issue, the flushing/irrigation supplies. (21)

The Council has considered how to resolve the above defects. In so doing, we not only have been mindful of the age of this case, but also have taken into account whether additional development consistent with our previous order would result in a different outcome on remand. With the exception of the small category of cases described in footnote 20, we are persuaded that additional development would not result in a different outcome, because any item or supply that was found not covered would be paid under the limitation of liability provisions. We reach this conclusion because 1) there is no evidence that either HCFA or the PEN carrier had specific medical policies on the questions identified in our order, such as the medical necessity of using sterile water to flush the gastrostomy tube and 2) the testimony and other evidence presented in the hearings before Judges Carney and Habermann was in sufficient conflict on the medical necessity of some of the supplies at issue that it is unlikely that the suppliers could be held to have had knowledge under 42 CFR 411.406(e)(3) that the supplies would not be covered. (22)

Moreover, although Judge Habermann's resolution of the coverage and documentation issues identified in our order was incomplete, the majority of the testimony provided in his hearing of July 12, 1999 supports a finding of coverage. Specifically, the testimony of Ms. Motta, which is described in detail at pages 11 through 16 of the hearing decision, supports a conclusion that the majority of the supplies provided by the appellants were reasonable and necessary to flush and irrigate the G-tube and to care for the stoma site. Moreover, in weighing the evidence, we, like the Administrative Law Judge, note that the evidence provided by the contractor on remand does not suggest that further proceedings would lead to a different result. Not only did the contractor send to the hearing a witness, Mr. Carter, who had no direct experience in these matters, but, as noted above, Ms. Spires conceded in her e-mail to Mr. Carter that the supplies at issue would been considered covered absent a finding that they were duplicative. In light of the above, we do not believe that further development of the case to resolve the issues raised in our December 1997 remand order would be productive or appropriate.

Accordingly, we adopt the Administrative Law Judge's finding that the flushing/irrigation supplies provided by the appellants to PEN beneficiaries for gastrostomy-related care were covered under the Medicare program and add a similar finding concerning the site care supplies. However, the above conclusion does not apply to any claims referenced in footnote 20 of this decision. We address the disposition of those claims in the Instructions section of this decision.

III. The Coding Issue

Sections I and II of this decision resolve the basic issues that were adjudicated by the PEN carrier in initial, review and carrier hearing determinations and by Judge Carney in her 1996 decision, i.e., which contractor(s) had jurisdiction over the claims at issue and whether some or all of the supplies were covered under the Medicare Act. In essence, these were the only issues squarely before Judge Habermann on remand, since they were the issues that were decided unfavorably to the appellant in the determinations below. However, in section XVI of the decision, entitled "APPROPRIATE BILLING CODE ISSUE." Judge Habermann concluded that the flushing/irrigation supplies should be paid under code A4400. We are not sustaining this finding for the following reasons:

1. Judge Habermann based his conclusions on evidence not adduced at the hearing.

None of the oral proceedings in this case have concerned the proper coding for the supplies at issue. This is typical in an appeal of claims denied in toto on Medicare coverage grounds; it is the common practice of Administrative Law Judges (or the Council) who reverse a contractor's coverage determination to simply direct the contractor to make the appropriate payment. Any payment determination by the contractor is then a new initial determination on a different issue, i.e, proper coding and payment amount, that may be appealed through the administrative appeals process.

In their August 2001 brief to the Council, the appellants contend that Judge Habermann had the authority to adjudicate the coding issue as a new issue under 20 CFR 404.946. We agree. However, he did not exercise that authority consistent with section 205(b) of the Act and 404.946. Specifically, he did not notice it as an issue to be decided nor did he take any evidence at the hearing concerning the issue. [ALJ Ex. 47, Order Following Pre-Hearing Conference.] The only discussion tangentially related to this question was during the closing remarks of appellant's counsel Mr. Robinson, i.e., that regardless of which carrier had jurisdiction, the suppliers should be paid according to rates that were established for the "A codes." [ALJ Ex. 76, page 71]. Specific codes for specific supplies were not discussed. Moreover, the written administrative record does not contain the February 1993 PBS document referred to throughout section XVI of the decision, nor is this document referenced in the Administrative Law Judge's exhibit list. Accordingly, there is no evidence of record supporting the conclusions reached by Judge Habermann in that portion of the decision.

2. The evidence of record does not support applying a single code to all of the flushing/irrigation supplies billed for in this case.

The discussion in section XVI of the hearing decision is premised on the assumption that all of the flushing/irrigation supplies were billed as kits. However, our examination of some of the individual claims submitted in this case does not support such a conclusion. To illustrate, we have appended to this decision two sample claims from two of the six suppliers. The first, for beneficiary A. M., pertains to an "irrigation set" provided on October 28, 1992, by Nursing Home Products Services. It bills under one procedure code (B9998) (23) for 90 units of the set, which is listed as containing a syringe adaptor sterile water, a pair of latex gloves, two 4 x 4 gauze pads, one alcohol prep. pad and one ABD pad. The second claim, submitted by Key Largo Medical Systems, Inc. for beneficiary W.P.. contains three separate billings, all coded B9998, for 30 units each of the following supplies: flush/irrigation supplies, i.e., lubrication jelly, sterile water and syringes. These claims show that while some suppliers billed flushing/irrigation supplies as a kit, others did not.

The record also suggests that both billing methods were appropriate. During her deposition, Debra Fulton stated that supplies could be billed as either kits or as separate supplies. Contractors were advised, however, not to allow suppliers to bill both the set and component parts on the same claim. [ALJ Ex. 11, Fulton deposition, page 77.]

In light of the above, we could not sustain assigning one "A code" to all of the flushing/irrigation supplies billed in this case even if we had determined that the local carriers had jurisdiction over the claims at issue.

3. The hearing decision does not address or resolve how the site care supplies should be reimbursed.

As noted in section II. Of this decision, the Administrative Law Judge did not make any specific findings concerning whether the site care supplies in this case were covered. In addition, he did not provide any direction in the body of his decision or his findings concerning how the site care supplies should be coded or paid. Accordingly, the Council finds that this latter coding issue is best resolved, at least initially, by the specialty carrier.

IV. Instructions

In light of the length and complexity of the proceedings and the somewhat incomplete resolution of the issues we identified in our remand order, we think it appropriate to provide some direction concerning how this decision should be effectuated.

A. Outlier claims. As we noted in section III., Judge Habermann did not adjudicate any of the individual claims in this case. Moreover, although he requested one of the carriers to draw a statistical sample, he did not use the sample to resolve the issues in this case. Accordingly, the issue of how to dispose of the "outlier" cases described in footnote 20 has not been resolved either by individual adjudication or by sampling.

Since the appellants did not address any of these claims in the remand proceedings, we are uncertain whether they wish to pursue them. Based on our screening of a few boxes of claims, we believe that they constitute a small percentage of the claims denied by the carrier hearing officer. Accordingly, we direct Palmetto to contact appellants' counsel concerning their clients' wishes before disposing of these claims. For any claims appellants do wish to pursue, we make this general finding:

Palmetto is not required to make payment on any claims that clearly pertain to non-gastrostomy patients, but should transfer such claims to the local carriers for processing. Palmetto is also not required to make payment for any claims submitted on behalf of patients who were not entitled to Medicare when the services were provided or on behalf of patients who died before the dates of service reported on the claim.

B. Claims for supplies provided to patients with gastrostomies.

As noted above, we have affirmed Judge Habermann's conclusion that the flushing/irrigation supplies and the site care supplies provided to patients with gastrostomies by the appellants did not duplicate supplies provided in the PEN supply kits. Therefore, in calculating payment for the supplies at issue, Palmetto may not reduce or otherwise adjust the payments for the supplies on the theory that they duplicate supplies already provided to a patient in a PEN supply kit. Moreover, any payment amounts established for the supplies at issue shall be comparable to payments made by Palmetto for similar supplies during the period at issue, but shall not exceed the amount billed.


After careful consideration of the entire record, the Medicare Appeals Council makes the following findings:

1. During the period at issue in this case, the PEN carrier, Blue Cross and Blue Shield of South Carolina, now designated Palmetto Government Benefits Administration, had jurisdiction over the claims for flushing/irrigation and site care supplies provided by the six appellants to beneficiaries with gastrostomies who received parenteral or enteral nutrition.

2. Both the flushing/irrigation and site care supplies described in the above finding were covered under the Medicare program during the period at issue.

3. The remainder of the supplies at issue in this case shall be disposed of consistent with footnote 20 and the instructions in section IV.A of this decision.

4. The six supplier appellants are entitled to payment for the supplies described in finding #1 consistent with the instructions in section IV.B of this decision.


Payment shall be made by Palmetto GBA for the flushing/irrigation and site care supplies provided to beneficiaries with gastrostomies consistent with the instructions in section IV.B of this decision. Claims for flushing/irrigation and site care supplies described in footnote 20 of this decision shall be processed consistent with the instructions in section IV.A of this decision.

DATE: April 5, 2002


M. Susan Wiley
Administrative Appeals Judge

Cecilia Sparks Ford
Administrative Appeals Judge


1. The seven original appellants were: Key Largo Medical Systems, Inc.; Citrus Management, Inc.; Genesis Medical Services, Inc.; MK Medical Supply, Inc,; Nursing Home Products and Services, Inc.; Pennsylvania Medical Supply, B.T.; and Ostomy Unlimited, Inc. Ostomy Unlimited subsequently withdrew its appeal and is no longer a party to this decision.

2. In 2001, the Health Care Financing Administration (HCFA) was renamed the Center for Medicare and Medicaid Services (CMS). Because all of the relevant events and policy issuances in this case precede the agency's redesignation, we will refer to the agency as HCFA throughout this decision.

3. In our remand order we found that because Judge Carney erroneously concluded that certain claims denied by the carrier hearing officer had been dismissed, she had not adjudicated all of the claims appealed. We directed the Administrative Law Judge to issue a decision on remand on all of the claims properly appealed, not just the claims pertaining to patients receiving parenteral or enteral nutrition. Judge Habermann's decision does not address any individual claims, nor contain any directions concerning the disposition of the "outlier" cases described in our order.

4. During the period at issue, the PEN benefit was administered by Blue Cross and Blue Shield of South Carolina (BCBS-SC), which is now known as Palmetto Government Benefits Administration. We will refer to the carrier as BCBS-SC throughout this decision.

5. The legislation provided, however, that for purposes of implementing the above provisions, parenteral and enteral nutrition nutrients, supplies and equipment were not included within the definition of prosthetics.

6. Section 1102 establishes the general authority to publish rules and regulations; section 1874(a) establishes the Secretary's general administrative authority to perform any of its functions under title XVIII either directly or by contract.

7. Many of the documents considered by Judges Carney and Habermann are referenced or appear in more than one exhibit. For example, the documents entered in the record by Judge Carney as Exhibits 1 through 3, which pertain to the appeal of this case at the carrier level, no longer appear in the administrative record as Exhibits 1 through 3; rather they are contained in Exhibits 32 through 34, which were entered in the record by Judge Habermann. (The documents that were originally in Exhibit 15 appear to have been similarly dispersed; it no longer appears in the record as a separate exhibit.) Other documents, many of them pertaining to the carrier jurisdiction issue, appear as exhibits appended to various depositions, and may also be entered separately as exhibits by the Administrative Law Judges and/or contained in attachments to briefs submitted by appellants' counsel or the agency. In this decision, we will only reference one location for each document cited. Exhibits entered into the record by Judges Carney and Habermann will be cited as "ALJ Ex.". Citations to documents entered as exhibits within deposition records will give both the ALJ exhibit number for the deposition record and the number given to the particular document during the deposition. Documents entered into the record by the Medicare Appeals Council will be cited "MAC Ex.".

8. ALJ Ex. 10, Robertson deposition, deposition exhibit 9.

9. In March 1997, HCFA moved this provision to section 3324 D.3 of the MCM. Section 3329 now pertains to Medicare Secondary Payer matters.

10. According to the record, approximately 99% of gastrostomy patients are PEN patients. Patients who have gastrostomies, but do not receive PEN include individuals with bowel obstruction and bowel cancer. [ALJ Ex. 11, Fulton deposition, pages 68-69.]

11. ALJ Ex.12, Hummel deposition, deposition exhibit 23.

12. See also, PBS memoranda of February 26, 1991 and February 22, 1991 (ALJ Ex. 12, Hummel deposition, deposition exhibits 24 and 27).

13. Hearing Exhibit 1.

14. Hearing Exhibit 2.

15. Hearing Exhibit 3.

16. Hearing Exhibit 9.

17. Were this a case involving a request for waiver of an overpayment, we might well conclude, as did Judges Stewart and Habermann in other decisions cited in the record, that the confusion caused by such issuances is relevant to determining whether there was good cause for reopening determinations on previously paid claims or whether the suppliers were "without fault" in causing the overpayment. However, as this case involves a request for payment of claims initially denied by a contractor, neither the regulations' reopening provisions nor the waiver provisions in section 1879 of the Act apply.

18. Appellants appended to their August 3, 2001 brief a decision issued on July 2, 1997 by Administrative Law Judge Kenneth Stewart concerning an overpayment that BCBS-FL assessed against a supplier of flushing and site care supplies. [MAC EX. 17, Tab T]. According to the decision, in 1993 BCBS-FL reopened a number of favorable determinations pertaining to these supplies. It then found that the suppliers had been overpaid because the supplies were not reasonable and necessary, as they duplicated supplies the PEN supplier had already paid. In considering whether BCBS-FL had good cause to reopen it prior determinations, Judge Stewart noted that a HCFA memorandum issued in 1990 represented HCFA's expressed policy regarding the jurisdiction of the PEN specialty carriers. Id. at page 19. Judge Stewart also noted, however, that the policy was not effectuated with any clarity so as to ensure any type of uniformity. We agree. However, while the confusion caused by conflicting policy statements may have been relevant to determining whether there was good cause to reopen determinations before Judge Stewart, it is less relevant in determining which carrier actually had jurisdiction over the claims.

19. Understandably, the contents of Ms. Spires e-mail to Mr. Carter have influenced the decisionmaking in this case. For example, as we explain below, we have found persuasive her statement that the PEN carrier would have found the supplies at issue to be covered if they were not duplicative. However, we do not consider her statements concerning jurisdiction to be as significant. For the reasons discussed above, we do not consider a carrier's perception of its jurisdictional boundaries as dispositive of the issue. We also note that Ms. Spires= remarks emphasize the codes the carrier had jurisdiction over, not the services. As indicated in HCFA's 1984 letter establishing the PEN carriers, the B codes were designated for PEN services to enable contractors to sort claims for services not within their jurisdiction, but the carriers' jurisdiction was defined by the services not the codes. Nonetheless, the Council does not condone any attempts that may have been made to improperly influence Ms. Spires' testimony concerning these matters.

20. Our remand order discussed this problem as follows:

In footnote two of the hearing decision, the Administrative Law Judge wrote that some of the gastrostomy supply claims initially submitted for payment were accompanied by documentation indicating that the beneficiaries had diagnoses of permanent urinary incontinence. The Administrative Law Judge wrote that "[t]hose claims were actually dismissed by BCBS/SC at the review level because they did not relate to the PEN program." Thus, the Administrative Law Judge continued, the claims "are not at issue here, despite the fact that they appear as denial number 4 in the carrier hearing decision."

On review of the record, the Medicare Appeals Council has found that the Administrative Law Judge erred in finding that all of the above-described claims were not before her on appeal. The carrier review determinations in the file and the carrier review worksheets that are now associated with each claim indicate that some of the above-described claims were, in fact, dismissed. The Carrier Hearing Officer decision and attachments show, however, that numerous other claims that were accompanied by urinary care-related documentation (as well as colostomy-related documentation) were considered by the Carrier Hearing Officer, appealed by the suppliers, and were properly before the Administrative Law Judge.

21. Although Judge Habermann's decision describes the testimony offered concerning the medical necessity of both the flushing/irrigation and site care supplies, Section XIV of the hearing decision, entitled MEDICARE COVERAGE ISSUES, only evaluates whether the flushing/irrigation supplies are covered and makes no mention of the site care supplies. Furthermore, Judge Habermann did not make any findings concerning the site care supplies. The only specific evaluation of the medical necessity of the site care supplies is in Section XIII, entitled CARRIER JURISDICTION, in which the Administrative Law Judge states:

...I find that the evidence submitted in the record supports the medical necessity and reasonableness for the gastrostomy supplies at issue in terms of preventing possible complications. These complications could arise from gastric or formula leakage which could lead to skin breakdown, bacterial invasion and inflammation, if proper daily site care is not maintained or if the G-tubes are not properly irrigated or flushed out.

22. For example, we are not convinced that there is sufficient evidence of record to establish that it is always medically reasonable and necessary to include sterile water in gastrostomy flushing and site care supplies. We note that while Ms. Motta indicated that it may be necessary to use sterile water in nursing homes whose regular water source is well water, her general conclusion appears to be that in other instances it is "preferable," rather than necessary. However, the record does not indicate that the suppliers would have had actual or constructive notice of this distinction.

23. As discussed throughout the record, claims for services submitted to the local carriers contained procedure codes beginning with an AA,@ while claims for PEN services submitted to the PEN carriers contained procedure codes beginning with a AB.@ In this case, the appellants were directed to submit claims to the PEN carrier with code B9998, a miscellaneous code, because none of the other available B codes were applicable.