Rhode Island Hosp. v. Sebelius, Civ. Action No. 06-05 S.

Decision Date24 November 2009
Docket NumberCiv. Action No. 06-05 S.
Citation670 F.Supp.2d 148
PartiesRHODE ISLAND HOSPITAL, Plaintiff, v. Kathleen SEBELIUS, et al., Defendants.
CourtU.S. District Court — District of Rhode Island

Lawrence W. Vernaglia, Hinckley, Allen & Snyder LLP, Boston, MA, Michael R. Edwards, Robert G. Flanders, Jr., Jeffrey A. Mega, Hinckley, Allen & Snyder LLP, Providence, RI, for Plaintiff.

Peter Robbins, Sheila Leiber, Vikas K. Desai, U.S. Department of Justice, Washington, DC, for Defendants.

OPINION AND ORDER

WILLIAM E. SMITH, District Judge.

Up until 1996, the Medicare program paid for medical research performed by residents at Rhode Island Hospital ("Plaintiff" or "RIH"). That year, however, the Secretary of Health and Human Services (the "Secretary") decided that only research related to patient care qualified for reimbursement under Medicare regulations. In an earlier phase of this case, the First Circuit upheld the Secretary's view. See R.I. Hosp. v. Leavitt, 548 F.3d 29 (1st Cir.2008). The immediate dispute concerns Plaintiff's claim that some resident research activities in 1996 actually involved caring for patients. Plaintiff pressed this argument at a hearing before the agency. In a single paragraph, the Secretary found that Plaintiff failed to document any research related to patient care in 1996, and therefore that Medicare covered none.

Plaintiff challenges the Secretary's ruling as arbitrary and capricious under the Administrative Procedure Act ("APA"), see 5 U.S.C. § 706 (2009), and seeks summary judgment reversing the decision. The Secretary and the Department of Health and Human Services ("Defendants") cross-move for summary judgment affirming the Secretary's determination as reasonable based on the evidence in the record. As fully explained below, the decision does not survive review under the APA because the Secretary failed to set forth adequate reasons for denying Plaintiff's claim. The decision fell short in two respects: (i) it failed clearly to explain the criteria by which the evidence was judged, and (ii) it appeared to rely on a 2001 regulation that cannot determine Plaintiff's Medicare payments for 1996. The Secretary's decision is therefore vacated and this case is remanded to the agency for further proceedings.

I. Background
A. Indirect Medical Education Reimbursement Under Medicare

Before turning to the facts of this case, a very brief summary of Medicare funding for teaching hospitals is necessary.1 Part A of the Medicare program allows hospitals to be reimbursed for the operating costs of providing inpatient services. Under the program, teaching hospitals may recover "indirect medical education" ("IME") expenses of patient care arising from the education and training of residents. The key variable in calculating the amount of IME reimbursement is the number of full-time equivalent residents ("FTEs") at a hospital. FTEs are defined by reference to the hours residents work. Only qualified activities under Medicare regulations count towards a hospital's FTE tally. See 42 C.F.R. § 412.105(f) (2009) (establishing rules for determining the number of FTEs).

B. Procedural History

For fiscal year 1996, Plaintiff sought IME payments for resident training expenses. The fiscal intermediary ("FI"), an insurance company used by Medicare to manage reimbursement, reduced Plaintiff's IME request by 12.06 FTEs attributable to educational research performed by residents. This resulted in a reimbursement disallowance of approximately $1 million. Because the residents' research did not relate to patient care, the FI found, it did not count towards FTEs under the 1996 version of 42 C.F.R. § 412.105(g) (the "1996 Regulation"), which governed FTE calculations. However, prior to 1996, Medicare had not excluded resident research activities from Plaintiff's IME reimbursement. Believing Medicare covered all resident research, Plaintiff appealed the FI's decision to the Provider Reimbursement Review Board ("PRRB") in 1998.

Plaintiff developed two arguments before the PRRB. Broadly, Plaintiff contended that the 1996 Regulation required reimbursement of pure educational research activities, regardless of whether they related to patient care. In the alternative, Plaintiff claimed that 7.49 of the disputed FTEs did, in fact, involve caring for patients. In that case, those FTEs should be approved even under the FI's view of the 1996 regulation.

Plaintiff gathered evidence to support its narrow argument during the discovery phase of PRRB proceedings. The evidence included statements from the program directors of departments affected by the FTE reduction (the "Directors") describing residents' research activities, and rotation schedules for the affected residents from 1996. In response to discovery requests from the FI, in December 2001 Plaintiff also asked Directors to complete questionnaires setting forth the percentage of resident research time directly related to patient care. (See Administrative Record, certified Feb. 15, 2006 ("A.R."), at 197.)

In the midst of discovery, in August, 2001 the Secretary issued an amendment to the Medicare regulations governing the calculation of FTEs (the "2001 Amendment"). The 2001 Amendment provides, "The time spent by a resident in research that is not associated with the treatment or diagnosis of a particular patient is not countable." 42 C.F.R. § 412.105(f)(1)(iii)(B) (2001). Upon releasing the 2001 Amendment, the Secretary claimed it simply clarified "longstanding policy." Changes to the Hospital Inpatient Prospective Payment Systems and Rates and Costs of Graduate Medical Education, 66 Fed.Reg. 39,828, 39,896-97 (Aug. 1, 2001). As discussed in detail below, a key issue in this case is what impact, if any, the 2001 Amendment had on the agency's decision about Plaintiff's 1996 FTE application.2

In September, 2005, the PRRB issued a decision accepting Plaintiff's broad argument that Medicare covered all resident research. On that basis alone it ruled in Plaintiff's favor. However, the Secretary reviewed the PRRB's ruling, and reversed it in November 2005. The Secretary found that under the 1996 Regulation, "Medicare ... only paid for costs related to patient care." (A.R. at 9.)

The Secretary went on to address Plaintiff's narrower argument [Plaintiff] has also argued that 7.49 FTEs of the total of 12.06 FTEs time was spent by residents in research related to the treatment or diagnosis of particular patients. The [Secretary] finds that a review of the record shows that [Plaintiff] did not demonstrate that these residents were involved in research activities related to patient care. To the extent the research times [are] alleged to be patient care related, the record does not show the percentage of time residents saw patients during a monthly research rotation and the research, if any, they may have engaged in that was related to patient care. This is in contrast to other evidence in [Plaintiff's] exhibits that these residents were involved in research activities using animals and other laboratory research conducted outside patient care areas. Accordingly, the [Secretary] finds that [Plaintiff] failed to provide sufficient contemporaneous documentation to support its claim that the time spent by residents in research was related to patient care.

(Id. at 10-11.) The Secretary also quoted a reference to animal research in one of the Director's questionnaires, and noted a discrepancy in the evidence about the number of hours residents worked per week. (See id. at 10-11 nn. 18-19.)

Plaintiff commenced this action to challenge the Secretary's ruling in January 2006.3 The parties cross-moved for summary judgment, and the District Court (Torres, J.) issued a decision in favor of Plaintiff in August 2007. The sole basis for that ruling was the District Court's determination that the 1996 Regulation did not exclude pure research time from the FTE count. The Secretary appealed the decision to the First Circuit.

The only question presented on appeal was whether the District Court correctly held that the Secretary could not impose a patient care requirement under the 1996 Regulation. The First Circuit reversed the District Court. See R.I. Hosp., 548 F.3d at 44. It approved the Secretary's interpretation of the 1996 Regulation "to exclude time that residents spend performing research unrelated to patient care." Id. at 32. The decision did not address the 2001 Amendment. Rather, the analysis focused on the language of the 1996 Regulation, and the Medicare statute. Because the Secretary's construction of the 1996 Regulation was reasonable, and not at odds with statutory commands, the First Circuit ratified the Secretary's view. As for Plaintiff's narrower argument that some research did involve patient care, the First Circuit "express[ed] no opinion." Id. at 44 n. 23. It then remanded the case to resolve Plaintiff's outstanding challenge to the Secretary's ruling on that argument.

II. Discussion

In broad strokes, Plaintiff attacks the Secretary's decision on two grounds: (i) it was arbitrary and capricious for the Secretary to provide no guidance about documenting research prior to 1996, and then to reject the proof Plaintiff offered after the fact, and (ii) the Secretary unreasonably determined that the research in dispute did not involve patient care. While Plaintiff's first argument goes too far, the Court nevertheless concludes that the Secretary's decision at a minimum requires clarification on the criteria used to judge the evidence. The Secretary's failure to adequately explain her decision necessitates a remand to the agency for further proceedings. The Court therefore need not reach the merits of Plaintiff's second argument.

A. Standard of Review

42 U.S.C. § 1395oo (f) authorizes judicial review of the Secretary's reimbursement decisions pursuant to the standards of the APA. See Visiting Nurse Ass'n Gregoria Auffant, Inc. v. Thompson, 447...

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