Saint Mary of Nazareth Hosp. Center v. Schweiker, s. 82-1034

Citation718 F.2d 459
Decision Date23 September 1983
Docket NumberNos. 82-1034,82-1047 and 82-1052,s. 82-1034
Parties, 3 Soc.Sec.Rep.Ser. 74 SAINT MARY OF NAZARETH HOSPITAL CENTER, et al., Appellants, v. Richard S. SCHWEIKER, Secretary of Health and Human Services. MOUNT ZION HOSPITAL AND MEDICAL CENTER, Appellant, v. Richard SCHWEIKER, in his official capacity as Secretary of Health and Human Services. WASHINGTON TOWNSHIP HOSPITAL DISTRICT d/b/a Washington Hospital, Appellant, v. Richard SCHWEIKER, in his official capacity as Secretary of Health and Human Services.
CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)

Appeals from the United States District Court for the District of Columbia (D.C.Civil No. 80-03280) (D.C.Civil No. 81-00396) (D.C.Civil No. 81-0994).

Dennis M. Barry, with whom J.D. Epstein, Houston, Tex., was on brief, for appellants.

Vicki L. Schulkin, Atty., Dept. of Health and Human Services, with whom Juan A. Del Real, Gen. Counsel, Dept. of Health and Human Services, Washington, D.C., was on brief, for appellee. Kenneth M. Raisler and Valerie K. Schurman, Asst. U.S. Attys., Washington, D.C., also entered appearances, for appellee.

Before WRIGHT and GINSBURG, Circuit Judges, and McGOWAN, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge McGOWAN.

McGOWAN, Senior Circuit Judge:

This case consolidates the group appeal of seventy hospitals and the individual appeals of two hospitals from the District Court's affirmance of the denial of their payment claims by the Deputy Administrator of the Health Care Financing Administration ("Deputy Administrator"). 1 The hospitals are providers of Medicare services and challenge the methods used by the Department of Health and Human Services ("HHS") 2 to reimburse them for those services. For the reasons stated below, we find merit in the hospitals' challenge to the accounting procedures and remand for the taking of further evidence. We withhold judgment on a jurisdictional question with respect to St. Vincent Hospital and Medical Center of Toledo.

I

The Medicare program subsidizes the medical care of elderly and disabled citizens. See 42 U.S.C. Sec. 1395c (Supp. V 1981). Part A of the program, which is involved in this case, reimburses certified health care institutions, such as hospitals and nursing homes, see id. Sec. 1395d (1976 & Supp. V 1981), for "the lesser of (A) the reasonable cost of such services, as determined under section 1395x(v) of this title ... or (B) the customary charges with respect to such services," id. Sec. 1395f(b)(1) (Supp. V 1981). Section 1395x(v) states that "[t]he reasonable cost of any services shall be the cost actually incurred, excluding" amounts not necessary to the efficient provision of health care. Such costs "shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs for various types or classes of institutions, agencies, and services." Id. Sec. 1395x(v)(1)(A) (1976). Although the Secretary is given considerable discretion in establishing these regulations, 3

[s]uch regulations shall (i) take into account both direct and indirect costs of providers of services ... in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this subchapter will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs....

Id. This provision clearly is meant to prevent the Medicare program from subsidizing non-Medicare related costs, but it equally clearly proscribes Medicare from being subsidized by non-Medicare sources.

The hospitals contend that the Secretary's implementation of his regulations has resulted in illegal subsidization of the Medicare program by non-Medicare payors. Under the regulations, reimbursement is calculated separately for routine services and for ancillary services. See 42 C.F.R. Sec. 405.452(b) (1977). 4 The dispute here focuses on the treatment of costs and patients in the hospitals' labor/delivery room area, which is an ancillary care area, see Provider Reimbursement Manual Sec. 2202.8 (HCFA Pub. 15-1) [hereinafter cited as Manual]. For accounting periods beginning on or after September 1, 1976, the Secretary has required that patients in ancillary areas at the census-taking hour 5 be counted in the inpatient routine population for purposes of calculating the average cost per diem for general routine inpatient care. Reimbursement for ancillary costs, however, continues to be made separately. Manual Sec. 2345. The hospitals complain that this formulation dilutes Medicare reimbursement. Patients in the labor/delivery room area do not receive any routine services until after they leave that area. 6 Since the average cost per diem for routine services is equal to the total annual cost of such services divided by the total number of inpatient days, 42 C.F.R. Sec. 405.452(d)(7) (1977), and since labor/delivery room patients are counted for purposes of the denominator but do not produce any costs counted in the numerator, the average cost per diem is distorted downward. Since a portion of their Medicare reimbursement is computed by multiplying the average cost per diem for routine services by the number of beneficiary routine inpatient days, 7 they argue that they are not being reimbursed adequately. This distortion is exacerbated, in their view, by the fact that Medicare beneficiaries make extremely little use of labor/delivery room facilities. 8

All but one of the hospitals involved here, see infra part IV, excluded labor/delivery room patients from their inpatient counts in calculating their routine average cost per diem. Their fiscal intermediaries, private organizations which are under contract with the Secretary to determine the amount of reimbursement allowed the hospitals, see 42 U.S.C. Sec. 1395h (1976 & Supp. V 1981), found Manual Sec. 2345 binding, included such patients in the inpatient count, and reduced the allowed reimbursement accordingly. The hospitals pursued their administrative remedies by appealing to the Provider Reimbursement Review Board ("PRRB"), 9 which found that "routine costs properly apportionable to Medicare patients are being siphoned off and apportioned to non-Medicare patients in the labor/delivery area." PRRB Case No. 79-78G, Decision at 6, reprinted in Joint Appendix ("J.A.") at 74, 79. The PRRB held that 42 C.F.R. Sec. 405.452(d)(7), which defines the average per diem costs, is controlling, and it concluded that section 452(d)(7)'s purposes would be served only if "the divisor in the formula for computing average per diem costs, i.e., inpatient days, [does] not include days [when] the costs associated with those days are not included in routine costs," i.e., the numerator. PRRB Dec. at 7, J.A. at 80.

The Secretary has the authority on his own motion to affirm, reverse, or modify the decisions of the PRRB, 42 U.S.C. Sec. 1395oo (f)(1) (Supp. V 1981), and that authority was delegated to the Administrator of the Health Care Financing Administration and ultimately to the Deputy Administrator. The Deputy Administrator reversed the PRRB's decision, the hospitals filed timely civil actions to contest that reversal in the District Court, see id., and in the consolidated case the District Court affirmed the Deputy Administrator's decision. Saint Mary of Nazareth Hospital Center v. Schweiker, [1981-2 Transfer Binder] MEDICARE & MEDICAID GUIDE (CCH) p 31,594 (D.D.C. Nov. 9, 1981) (No. 80-3280), reprinted in J.A. at 44. The court found "the fact that historically there has been a lack of uniformity of treatment of this aspect of Medicare reimbursement by both the agency and the hospitals indicates that the issue is not so one-sided" as to indicate agency irrationality. Id. at 9904, reprinted in J.A. at 45-46. The court also found averaging a necessary part of the Medicare reimbursement scheme and that some imprecision, such as that alleged here, is inherent in averaging. Finally, the court concluded that Manual Sec. 2345 is reasonably consistent with the controlling regulations. These reasons convinced the court that there is a rational basis for the Deputy Administrator's decision. Id.

II

Although ordinarily the agency's interpretation of its own regulations is entitled to deference, "[v]arying degrees of deference are accorded to administrative interpretations, based on such factors as the timing and consistency of the agency's position, and the nature of its expertise." Batterton v. Francis, 432 U.S. 416, 425 n. 9, 97 S.Ct. 2399, 2405 n. 9, 53 L.Ed.2d 448 (1977). Cf. Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 164, 89 L.Ed. 124 (1944) (weight of agency's interpretation of statute "will depend upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements"); General Electric Co. v. Gilbert, 429 U.S. 125, 141-42, 97 S.Ct. 401, 410-11, 50 L.Ed.2d 343 (1976) (quoting Skidmore ); Morton v. Ruiz, 415 U.S. 199, 237, 94 S.Ct. 1055, 1075, 39 L.Ed.2d 270 (1974) (same); United Transportation Union v. Lewis, 711 F.2d 233, 242 (D.C.Cir.1983) ("A statutory construction to which an agency has not consistently adhered is owed no deference."). HHS has not consistently enforced the interpretation at issue here, and the matter has been the subject of considerable confusion.

The record indicates that there was no specific reference to the treatment of the labor/delivery area, at least for purposes of calculating the average per diem cost of routine inpatient care, until late 1972. 10 The Bureau of Health Insurance (the "Bureau"), which administered Medicare reimbursement before the Health Care Financing Administration ("HCFA"), had proposed a new cost reporting...

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