Little Co. of Mary Hosp. and Health Care Centers v. Shalala, s. 93-2032

• Citation: 24 F.3d 984
• Decision Date: 19 May 1994
• Docket Number: 93-2922,Nos. 93-2032,s. 93-2032
• Parties: , Medicare & Medicaid Guide P 42,269 LITTLE COMPANY OF MARY HOSPITAL AND HEALTH CARE CENTERS, an Illinois Not-For-Profit corporation, Plaintiff-Appellant, v. Donna SHALALA, as Secretary of the U.S. Department of Health and Human Services, Gail R. Wilensky, as Administrator of the Health Care Financing Administration, Blue Cross and Blue Shield of Illinois, et al., Defendants-Appellees, and LITTLE COMPANY OF MARY HOSPITAL AND HEALTH CARE CENTERS, an Illinois Not-For-Profit Corporation, Plaintiff-Appellant, v. Donna E. SHALALA, Secretary of Health and Human Services, and William Toby, Jr., as Acting Administrator of the Healthcare Financing Administration, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

Page 984

24 F.3d 984

44 Soc.Sec.Rep.Ser. 469, Medicare & Medicaid Guide

P 42,269

LITTLE COMPANY OF MARY HOSPITAL AND HEALTH CARE CENTERS, an Illinois Not-For-Profit corporation, Plaintiff-Appellant, v. Donna SHALALA, as Secretary of the U.S. Department of Health and Human Services, Gail R. Wilensky, as Administrator of

the Health Care Financing Administration, Blue Cross and

Blue Shield of Illinois, et al., Defendants-Appellees, and LITTLE COMPANY OF MARY HOSPITAL AND HEALTH CARE CENTERS, an Illinois Not-For-Profit Corporation, Plaintiff-Appellant, v. Donna E. SHALALA, Secretary of Health and Human Services, and William Toby, Jr., as Acting Administrator of

the Healthcare Financing Administration,

Defendants-Appellees.

Nos. 93-2032, 93-2922.

United States Court of Appeals, Seventh Circuit.

Argued Feb. 14, 1994.

Decided May 19, 1994.

Joshua G. Vincent, William G. Swindal, D. Kendall Griffith, Kristin E. Hutson, Kurt L. Hudson (argued), Hinshaw & Culbertson, Chicago, IL, for Little Co. of Mary Hosp. and Health Care Centers.

Alan S. Dorn (argued), Dept. of Health and Human Services, Region V, Office of Gen. Counsel, James J. Kubik, Asst. U.S. Atty., Civ. Div., Appellate Section, Chicago, IL, for Donna E. Shalala and William Toby, Jr.

Before POSNER, Chief Judge, CUDAHY, Circuit Judge, and McDADE, District Judge. ^*

CUDAHY, Circuit Judge.

Hospitals that provide inpatient treatment for Medicare patients are paid a predetermined amount per patient discharged, based primarily on the patient's diagnosis. ¹ Under the Prospective Payment System (PPS), instituted in 1983, in order to receive payment, the hospital--when a patient is discharged--assigns the discharge a Diagnostic Related Group (DRG) number. This is essentially a code number that correlates with the national average cost of providing the necessary services for that diagnosis, adjusted for regional variations. The DRG is a function of the patient's diagnosis, age, sex and medical history. The hospital sends the DRG assignment to an insurance company (or "intermediary," which is acting on behalf of the Department of Health and Human Services (HHS)), and the insurance company pays the hospital.

The patient's diagnosis is factored into this equation by matching the diagnosis with a corresponding number from the International Classification of Diseases, 9th edition-Clinical Model coding system (ICD-9), a medically-recognized ranking of diagnoses. The ICD-9 code and the other relevant factors are combined, through a formula, to generate the DRG. It appears that the higher the ICD-9 code, the more costly it is to treat the diagnosis, since higher ICD-9 codes yield higher DRGs, and therefore larger payments to the hospital.

Little Company of Mary Hospital and Health Care Centers (Little Company) allegedly received the assistance of its intermediary, Blue Cross/Blue Shield of Illinois, in designing its computer system. The design was arranged in such a way that the hospital staff would input the relevant factors (including the ICD-9 code), and the computer would automatically assign the patient a DRG.

But when the Prospective Payment System was first instituted in 1983, with just three exceptions, all ICD-9 codes greater than 86.99 were treated alike. ² Little Company's computer system was therefore apparently programmed in such a way that when an ICD-9 code greater than 86.99 was entered, the system would only look to see whether the code entered was one of the three exceptions. If not, the DRG assignment routine treated the code as if it were 86.99. "Hard-coding" logic in a code-based computer program, especially one based on rapidly-changing government regulations, which is what happened here, is considered one of the cardinal sins in the design of computer software, and this case demonstrates why.

Little Company's system worked perfectly well as long as the ICD-9 codes greater than 86.99 were in fact irrelevant to the DRG computation. But on October 1, 1987, the Secretary established a new DRG--DRG 475 (Respiratory System Diagnosis with Ventilator Support). DRG 475 applied to ICD-9 codes between 93.92 and 96.04. But Little Company did not respond to the creation of DRG 475 by modifying its software to take advantage of the change. Therefore, for diagnoses that corresponded with these newly-recognized ICD-9 codes (and there were 88 of these diagnoses submitted between October 1987 and September 1989, when Little Company discovered its mistake), Little Company's system generated "deflated" DRGs. The hospital therefore underbilled the insurance company--and was as a result underpaid--more than $300,000 over this two-year stretch.

It took Little Company almost two years to discover its mistake. Little Company then asked Blue Cross, its intermediary, to revise these DRGs, but Blue Cross refused, citing the HHS regulation that gives hospitals only 60 days to correct erroneous DRG assignments. See 42 C.F.R. Sec. 412.60(d). Little Company sought to appeal its year-end reimbursement calculations for both 1988 and 1989 to the Provider Review Reimbursement Board (PRRB), but the PRRB refused to take jurisdiction over the appeals. Each of these decisions was appealed to the district court: the period ending June 30, 1988 to Judge Williams, and the period ending June 30, 1989 to Judge Plunkett. Both affirmed the PRRB's declination of jurisdiction, though their reasoning differed slightly. The appeals from these decisions have been consolidated, and are now before us. We affirm, for reasons we explain below.

I

By enacting the Prospective Payment System in 1983, Congress dramatically altered the mechanism by which hospitals are paid for treating Medicare patients. The former system paid hospitals, after the fact, for the actual "reasonable" expenses they incurred. This system, it was argued, "was like giving hospitals a blank check to cover the cost of care for the elderly," because increased hospital costs were simply forwarded to Medicare. Judith R. Lave, The Impact of the Medicare Prospective Payment System And Recommendations For Change, 7 Yale J. Reg. 499, 501 (1990).

Congress, too, observed that this regime discouraged hospitals from finding more cost-effective methods of treatment, and thus replaced this system with the Prospective Payment System, enacting the Social Security Amendments of 1983, Pub.L. No. 98-21, 97 Stat. 65. Under PPS, diagnoses are classified into one of 475 DRGs. The DRG--not the actual cost of treating the patient--determines the hospital's payment. One might hypothesize that the effect of such a change would be to encourage hospitals to reduce the cost--and perhaps the quality--of care provided (since additional days of care generate increased costs but, very likely, no revenue). In practice, however, it has proven "difficult to isolate the specific effects of PPS." Lave, 7 Yale J.Reg. at 508. See also Note, Rethinking Medical Malpractice Law in Light of Medicare Cost Cutting, 98 Harv.L.Rev. 1004, 1008 (1985) (arguing that under PPS "the need to abide by cost-cutting protocols is likely to cause physicians to act in a manner that sometimes falls below the professional standards by which they are judged by both their peers and the courts").

A

Under Medicare's basic framework, set out at 42 U.S.C. Sec. 1395 et seq., HHS enters into a contract with an insurance company, and that insurance company pays hospitals, on behalf of HHS, for treating Medicare patients. The insurance company's decision whether and how much to pay the hospital are reviewable by the HHS Provider Reimbursement Review Board (PRRB or Board), whose determinations, in turn, are subject to judicial review. This essential structure of review pre-dates the institution of the Prospective Payment System, though Congress amended the review procedures when it enacted PPS.

Under the system of payment in effect before PPS, hospitals (or "providers") would at the end of the fiscal year submit a cost report to the intermediary. The intermediary would audit the report to determine which costs would be reimbursed, and report its conclusion as to the total amount due to the provider in a Notice of Program Reimbursement (NPR). The intermediary would make estimated interim payments throughout the year, but no final determination was made until the NPR was issued. In that document the estimated interim payments would be retroactively adjusted to bring the amount paid into line with the "reasonable" costs the hospital actually incurred. When the NPR was issued, a provider could seek review before the PRRB.

The PRRB's jurisdiction is created by 42 U.S.C. Sec. 1395oo. Before the advent of PPS, that section read, in pertinent part:

Any provider of services which has filed a required cost report within the time specified in regulations may obtain a hearing with respect to such cost report by a Provider Rimbursement Review Board ... if--

(1) such provider--

(A) is dissatisfied with a final determination of the organization serving as its fiscal intermediary ... as to the amount of total program reimbursement due the provider ...

42 U.S.C. Sec. 1395oo (1982).

Thus, because the PRRB only had jurisdiction to hear a challenge to a "final determination of the ... intermediary" as to the "amount of total program reimbursement," only the issuance of the year-end NPR--and not the interim payments themselves--would trigger the Board's jurisdiction.

B

In enacting PPS, Congress made a number of changes in the appeals process. The amended statute laying out the Board's jurisdiction reads as follows (with new language in italics):

Any provider of services which has filed a required cost report within the time specified in regulations may obtain a hearing with respect to such cost report by a Provider Reimbursement Review Board ... and ... any hospital which receives payments in amounts computed under subsection (b) or (d) of section 1395ww of this title and which has submitted such reports...