                    United States Court of Appeals
                          FOR THE EIGHTH CIRCUIT
                                   ___________

                                   No. 00-1959
                                   ___________

In Home Health, Inc., a                 *
Minnesota corporation,                  *
                                        *
            Appellee,                   *
                                        * Appeal from the United States
      v.                                * District Court for the
                                        * District of Minnesota
Donna Shalala, Secretary                *
of Health and Human Services,           *
                                        *
            Appellant.                  *
                                   ___________

                             Submitted: December 13, 2000

                                 Filed: November 19, 2001
                                  ___________

Before McMILLIAN, FAGG and MURPHY, Circuit Judges.
                           ___________

McMILLIAN, Circuit Judge.

       The Secretary of the Department of Health and Human Services (the
“Secretary”) appeals from a final order entered in the United States District Court1
for the District of Minnesota granting summary judgment in favor of In Home Health,
Inc. (“In Home”), reversing the Secretary’s decision to disallow Medicare


      1
      The Honorable Richard H. Kyle, United States District Judge for the District
of Minnesota.
reimbursement for charges covering in-home physical therapy services in excess of
the cost limits created by the Secretary on the grounds that the cost limits were
outdated and thus contrary to the Secretary’s regulations. In Home Health, Inc. v.
Shalala, No. 98-1731 (D. Minn. Jan. 13, 2000) (memorandum opinion and order).
For reversal, the Secretary argues that the district court: (1) lacked federal subject
matter jurisdiction because In Home failed to exhaust its administrative remedies,
(2) lacked federal subject matter jurisdiction because the amount in controversy did
not meet the jurisdictional requisite, and (3) erred in setting aside the Secretary’s
reasonable interpretation of her own regulations. For the reasons discussed below,
we reverse the judgment of the district court.

                                    Jurisdiction

       Jurisdiction in the district court was based upon 42 U.S.C. § 1395oo(f)(1);
jurisdiction on appeal is based upon 28 U.S.C. § 1291. The notice of appeal was
timely filed pursuant to Fed. R. App. P. 4(a).

                                    Background

      The undisputed facts of this case relate to In Home’s request for
reimbursement from the Secretary for the costs of in-home physical therapy services
provided to Medicare recipients in excess of the amounts set forth in the guidelines
created by the Secretary.

      Pursuant to the Medicare Act, 42 U.S.C. §§ 1395 et seq., the Health Care
Financing Administration (“HCFA”), a branch of the Department of Health and
Human Services (“HHS”), delegates to contracting intermediaries the task of
determining the appropriate reimbursement for home health services provided to
Medicare beneficiaries based upon an annual cost report submitted by the provider.



                                         -2-
See 42 U.S.C. § 1395h(a)2; 42 C.F.R. § 413.20(b).3 A provider is entitled to recover
the “reasonable cost” of the services it provides to Medicare beneficiaries. See 42
U.S.C. §§ 1395f,4 1395l(a)(2)(A)(i).5 Reasonable costs are defined as “the cost
actually incurred, excluding [any cost] found to be unnecessary in the efficient
delivery of needed health services, [to] be determined in accordance with [the
Secretary’s] regulations.” Id. § 1395x(v)(1)(A).

       In 1972, Congress authorized the Secretary to establish limits for reasonable
costs for certain services, including the in-home physical therapy services at issue in
this appeal.6 As a result, the Secretary promulgated the regulations at issue, codified

      2
       42 U.S.C. § 1395h(a) authorizes the Secretary to contract with intermediaries
to determine Medicare reimbursement amounts.
      3
       42 C.F.R. § 413.20(b) requires submission of an annual cost report to
intermediaries as the basis for reimbursement.
      4
        42 U.S.C. § 1395f permits Medicare providers to receive the reasonable cost
of the services provided.
      5
      42 U.S.C. § 1395l(a)(2)(A)(i) enables reimbursement of the reasonable cost
of home health services as defined by 42 U.S.C. § 1395x(v).
      6
          42 U.S.C. § 1395x(v)(5)(A) provides in part that

               Where physical therapy services . . . are furnished under an
               arrangement with a provider of services . . . the amount
               included in any payment to such provider . . . as the
               reasonable cost of such services . . . shall not exceed an
               amount equal to the salary which would reasonably have
               been paid for such services . . . to the person performing
               them if they had been performed in an employment
               relationship with such provider or other organization . . .
               plus the cost of such other expenses . . . incurred by such
               person, as the Secretary may in regulations determine to be
               appropriate.
                                           -3-
at 42 C.F.R. § 413.106, which base the “reasonable cost” of physical therapy services
upon published salary equivalency guidelines (“the guidelines”), to be “determined
on a periodic basis.” The regulation directs HCFA to determine the guideline
amounts by adding together: (1) the “prevailing hourly salary rate” “based on the 75th
percentile of salary ranges paid by providers in the geographical area,” (2) the amount
of fringe benefits generally received by an employee physical therapist, and (3) the
amount of expenses generally incurred by a non-employee physical therapist. See 42
C.F.R. § 413.106(b)(1), (2), and (3).

       From 1975 to 1983, the Secretary increased the guideline amounts
approximately every one to two years, using new wage data, inflation factors, and
other recalculations. In 1983, the guidelines were recalculated on the basis of new
wage data and included an automatic 0.6% monthly non-compounded increase (7.2%
annually). These guidelines remained in place until 1998, covering the years at issue
in this appeal.

       If a provider disputes the intermediary’s reimbursement decision, it may initiate
an administrative review process. First, the provider may request an exception from
the intermediary based on special circumstances, such as where the guidelines are
inappropriate due to “unique circumstances or special labor market conditions.” Id.
§ 413.106(f)(1). To qualify for this exception, a provider must prove that: (1) “the
going rate in the area for this particular type of service is higher than the guideline
limit,” and (2) “such services are unavailable at the guideline amounts.” HCFA Pub.
15-1 § 1414.2. If an exception does not apply or if the intermediary rejects the
exception request, the provider may appeal to the Provider Reimbursement Review
Board (“the Board”). See 42 C.F.R. § 413.106(g).7 The Board’s decision becomes
final unless the Secretary decides to review it, in which case the Secretary’s decision


      7
      42 C.F.R. § 413.106(g) authorizes an administrative hearing regarding “a
determination with respect to an exception” sought under 42 C.F.R. § 413.106(f).
                                          -4-
is final. When a decision becomes final, a provider may request judicial review
pursuant to 42 U.S.C. § 1395oo(f)(1).8

        In this appeal, In Home, a Minnesota corporation with offices in many cities,
filed a group appeal to the Board, requesting reimbursement for costs in excess of the
guidelines for five offices for the years 1992 and 1993.9 Four different intermediaries
handled the various reimbursement requests. After receiving notification from the
intermediaries regarding each reimbursement determination, In Home consolidated
its claims and appealed directly to the Board, seeking reimbursement for its actual
expenses incurred for services performed by outside contractor physical therapists in




       8
        42 U.S.C. § 1395oo(f)(1) confers federal subject matter jurisdiction by giving
providers “the right to obtain judicial review of any final decision of the Board . . .
[or] the Secretary . . . in the district court of the United States for the judicial district
in which the provider is located.”
       9
         One of In Home’s offices is located in San Leandro, California, and was the
subject of a related appeal before this Court, In Home Health, Inc. v. Shalala, 188
F.3d 1043 (8th Cir. 1999) (“In Home I”). In that case, In Home sought reimbursement
for medical services provided by paid-per-visit employees on the basis that the
guidelines did not apply to the employees at issue and that, even if the guidelines did
apply, they were invalid because they were based on flawed and outdated data. In its
appeal to the Board, In Home applied for a “special labor market conditions”
exception from the guidelines for its San Leandro office, contending that the going
rate for physical therapy in the relevant area was higher than the guideline limits. The
intermediary found that In Home failed to demonstrate that it was unable to obtain
services at the guideline rate and denied its request for an exception. After the
Secretary affirmed the denial of the exception, In Home sought judicial review. The
district court reversed the Secretary’s conclusion, finding instead that the guidelines
did not apply to paid-per-visit employees. This court affirmed the judgment of the
district court.



                                            -5-
excess of the cost limits set by the guidelines.10 In Home did not request an exception
under 42 C.F.R. § 413.106(f) from the intermediaries to approve its excess costs,
instead relying on the Administrative Procedure Act, 5 U.S.C. § 706(2), to contend
that the guidelines were arbitrary, capricious, and contrary to law because they were
outdated, as they had not been reevaluated since 1983.

        The Board found that the guidelines were properly promulgated by the
Secretary and correctly applied by the intermediaries. Furthermore, the Board
determined that In Home could not seek relief from the application of the guidelines
because it had not exhausted its administrative remedies by requesting an exception
before appealing to the Board. The Board concluded that the purpose of the
exception process is to supply an administrative remedy for providers to contest the
reasonableness of the guideline amounts. The Board assessed that In Home failed to
adequately pursue its administrative remedies by neglecting to submit evidence
concerning (1) whether the guidelines were reasonable and (2) whether it was able
to obtain physical therapy services in its geographical areas at or below the guideline
rates, as required by the exception process. The Secretary did not review the decision
of the Board and the Board’s decision became final for purposes of judicial review.

      In Home then filed this action for judicial review in the district court, and
moved for summary judgment. The district court granted summary judgment in favor
of In Home. The district court found that In Home failed to request an exception
under 42 C.F.R. § 413.106(f), and therefore had not exhausted its administrative
remedies. However, the district court determined that In Home’s failure to exhaust


      10
         The present appeal includes reimbursement requests from the San Leandro
office, which have been paid pursuant to our mandate in In Home I. The amounts
already collected in the prior action comprise part of the requisite amount in
controversy for a group appeal which is necessary to trigger subject matter
jurisdiction in this court. This issue forms the basis of the Secretary’s other
jurisdictional argument in the current appeal.
                                         -6-
its administrative remedies was excusable due to the futility of seeking the exception,
explaining that the guidelines were inappropriate not because of unique
circumstances or special labor market conditions, but rather because they were
outdated and therefore inappropriate in all situations. On the merits, the district court
concluded that the guidelines violated the plain language of the regulations and thus
were contrary to law because they: (1) were not determined “on a periodic basis” and
(2) did not reflect the 75th percentile of prevailing salary ranges in the years at issue.
This appeal followed.

                                      Discussion

       The Secretary argues that the district court lacked subject matter jurisdiction
because In Home had not exhausted its available administrative remedies. The
Secretary contends that, by failing to request an exception from the intermediaries,
In Home bypassed the appropriate administrative avenue for its grievance, and may
not raise the issue in federal court when it was not adjudicated through the Secretary.
The Secretary further asserts that the district court erred in excusing In Home’s failure
to exhaust its administrative remedies because the exception process, rather than
being futile, offered In Home the opportunity to request the exact relief it seeks in this
judicial appeal – the costs it incurred in excess of the amounts authorized by the
Secretary’s guidelines.

       In Home counters that the district court was correct in excusing its failure to
exhaust administrative remedies because it was not contesting the guidelines based
on its unique circumstances or special labor market conditions, as required by the
language of 42 C.F.R. § 413.106(f). Instead, In Home relies on the district court’s
conclusion that the validity of the guidelines is a separate and distinct issue unrelated
to In Home’s specific circumstances, thereby excusing In Home from requesting an
exception based on those circumstances.



                                           -7-
       Subject matter jurisdiction based upon exhaustion of administrative remedies
is a question of law which we review de novo. Bueford v. Resolution Trust Corp.,
991 F.2d 481, 484 (8th Cir. 1993).

       By granting “the right to obtain judicial review of any final decision,” 42
U.S.C. § 1395oo(f)(1) makes it clear that federal judicial review of Medicare
reimbursement decisions is available only after the Secretary renders a final decision.
See Heckler v. Ringer, 466 U.S. 602, 605 (1984) (Ringer) (“[j]udicial review of
claims arising under the Medicare Act is available only after the Secretary renders a
‘final decision’ on the claim”). A “final decision” is issued on a Medicare claim only
after administrative review has been exhausted. See id. at 606 (requiring a claimant
to go through all designated levels of administrative review before considering the
administrative decision to be final); Barrett v. Shalala, 14 F.3d 26, 27 (8th Cir. 1994)
(holding that the district court lacked subject matter jurisdiction to review the
Secretary’s decision because administrative remedies had not been exhausted).

      In the present case, In Home concedes that it did not pursue the unique
circumstances or special labor market exception from the intermediaries, which was
available under 42 C.F.R. § 413.106(f) as part of the administrative review process.
The regulation in question, 42 C.F.R. § 413.106(g), authorizes “a hearing on the
determination of an intermediary concerning the therapy costs determined to be
allowable based on the provisions of this section, including a determination with
respect to an exception under [42 C.F.R. § 413.106(f)].” This language makes it clear
that an appeal to the Board is contingent upon an initial determination by the
intermediary regarding an available exception. Because In Home did not request an
exception to the guidelines from the intermediaries, it failed to take advantage of the
administrative remedy provided by 42 C.F.R. § 413.106(g). Accord Mercy Hospital
v. Heckler, 777 F.2d 1028, 1037-38 (5th Cir. 1985) (Mercy Hospital) (requiring that
an exception be requested from the intermediary in order to qualify for review by the
Board).

                                          -8-
      Generally, a provider who fails to exhaust its administrative remedies will be
precluded from seeking relief in federal court. See Weinberger v. Salfi, 422 U.S. 749,
764 (1975) (Salfi) (limiting federal court jurisdiction on Medicare claims to “final”
decisions of the Secretary), Anderson v. Sullivan, 959 F.2d 690, 691 (8th Cir. 1992)
(Anderson) (stating that failure to exhaust administrative remedies “robs this court
of subject matter jurisdiction”).

      Exhaustion is generally required as a matter of preventing premature
      interference with agency processes, so that the agency may function
      efficiently and so that it may have an opportunity to correct its own
      errors, to afford the parties and the courts the benefit of its experience
      and expertise, and to compile a record which is adequate for judicial
      review.

Salfi, 422 U.S. at 765.

       However, a provider may find an exception to the exhaustion requirement if:
(1) the claim involves a legitimate constitutional claim, (2) irreparable harm would
result from exhaustion, or (3) further administrative procedures would be futile.
Anderson, 959 F.2d at 693 (citing Thorbus v. Bowen, 848 F.2d 901, 903 (8th Cir.
1988)).

       In the present case, the district court concluded that it would have been futile
for In Home to pursue further administrative procedures through the available
exception process because the exceptions were irrelevant to In Home’s claims. We
disagree. In Home failed to meet its burden of proving that the applicable
administrative remedies would have been futile. See Honig v. Doe, 484 U.S. 305,
327 (1988) (placing the burden of proof for proving futility upon the party appealing
to the agency). Both In Home’s petition for judicial review in this court and the
exception provided by 42 C.F.R. § 413.106(f) are premised on the same logic: that
the guideline rates were insufficient because they inadequately measured the
reasonable costs of the services provided. By requiring evidence that the going rate

                                         -9-
in its geographical areas was higher than the guideline limits and that the required
services were unavailable at or below the guideline amounts, see HCFA Pub. 15-1
§ 1414.2, the exception provided an adequate administrative remedy to correct
insufficient guideline cost limits. In Home could have received the relief it seeks here
through the agency’s exception process. As a result, requesting an exception from
the intermediaries was not futile, but rather a necessary prerequisite to judicial
review. Accord Mercy Hospital, 777 F.2d at 1039 (“where the regulatory scheme
clearly indicates an administrative exception to be the appropriate course for relief
from an application of the usual standards, we cannot but conclude that the failure to
exhaust specifically available administrative remedies precludes an attack of the kind
here made on the validity of the administrative scheme or its general normative
standards”); see Ringer, 466 U.S. at 614 (futility not available as an excuse where an
adequate administrative remedy existed for the type of harm sought to be redressed
by judicial review); see also Schoolcraft v. Sullivan, 971 F.2d 81, 87 (8th Cir. 1992)
(recognizing that where the purposes underlying the exhaustion doctrine are relevant,
exhaustion of administrative remedies may not be excused).

       By failing to request the exception from the intermediaries, In Home lost the
opportunity to compile a record adequate for judicial review. See Ringer, 466 U.S.
at 619 n.12 (noting that in the Medicare context, one “purpose of the exhaustion
requirement is . . . to ‘compile a record which is adequate for judicial review’”)
(quoting Weinberger v. Salfi, 422 U.S. 749, 765 (1975)). The exception process is
designed to enable intermediaries to gather evidence regarding the rates paid by other
providers in the area and compare that data to the specific situation at issue. See
HCFA Pub. 15-1 § 1414.2; accord Bedford Medical Center v. Heckler, 766 F.2d 321,
324-25 (7th Cir. 1985) (exception request required intermediary to perform a fact-
intensive survey to determine reasonableness of cost limits). In Home lost the
opportunity to create a record or seek reimbursement for its actual costs through the
appropriate agency channels, and cannot regain that opportunity by appealing to this
court. Accord Mercy Hospital, 777 F.2d at 1039 (failure to utilize the exception

                                         -10-
process to create a record for the issue on appeal prevented provider from justifying
its assertions on the merits).

       We hold that the district court erred in excusing In Home from its failure to
exhaust administrative remedies. As a result, the district court lacked federal subject
matter jurisdiction over In Home’s claims. Therefore, the district court had no
authority to reverse the Secretary’s decision, and the Secretary’s decision must be
reinstated. Because we reverse on these jurisdictional grounds, we need not address
the other arguments presented on appeal.

                                     Conclusion

      Accordingly, the order of the district court is reversed.

      A true copy.

             Attest:

                CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.




                                         -11-
