Atrium Med. Ctr. v. U.S. Dep't of Health & Human Servs.

Decision Date08 September 2014
Docket NumberNo. 13–3288.,13–3288.
PartiesATRIUM MEDICAL CENTER, et al., Plaintiffs–Appellants, v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Defendant–Appellee.
CourtU.S. Court of Appeals — Sixth Circuit

766 F.3d 560

ATRIUM MEDICAL CENTER, et al., Plaintiffs–Appellants,
v.
UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Defendant–Appellee.

No. 13–3288.

United States Court of Appeals,
Sixth Circuit.

Argued: Dec. 5, 2013.
Decided and Filed: Sept. 8, 2014.


[766 F.3d 563]


ARGUED:Keith D. Barber, Hall Render Killian Heath & Lyman, P.C., Indianapolis, Indiana, for Appellants.
Brett Bierer, United States Department Of Health & Human Services, Baltimore, Maryland, for Appellees. ON BRIEF:Keith D. Barber, N. Kent Smith, Hall Render Killian Heath & Lyman, P.C., Indianapolis, Indiana, for Appellants. Brett Bierer, United States Department Of Health & Human Services, Baltimore, Maryland, for Appellees.

Before: McKEAGUE and STRANCH, Circuit Judges; COLLIER, District Judge.
*

[766 F.3d 564]



STRANCH, J., delivered the opinion of the court, in which COLLIER, D.J., joined, and McKEAGUE, J., joined in the result.
McKEAGUE, J. (pg. 575), delivered a separate opinion concurring in the judgment.

OPINION

STRANCH, Circuit Judge.

Two groups of hospitals, one in the Cincinnati area and the other in rural Iowa, challenged the Secretary of Health and Human Services' calculation of how much to pay those hospitals for inpatient services under Medicare Part A. The hospitals objected to the Secretary's decision to include in the calculation the hours associated with two types of programs: a short-term disability program paid from a hospital's general funds through its payroll system and a program offering a full-time salary for part-time weekend work. The district court entered summary judgment for the Secretary. We AFFIRM.

I. BACKGROUND

This is a Medicare case, which requires us to grapple with some of “the most completely impenetrable texts within human experience,” statutes and regulations that “one approaches ... at the level of specificity herein demanded with dread.” Rehab. Ass'n of Va., Inc. v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir.1994). The slim hope of rendering a comprehensible opinion counsels us to begin with an overview of the Medicare reimbursement program as it pertains to this dispute.

A. The Wage Index: Statutory and Regulatory Framework

Under Medicare Part A, hospitals are reimbursed for inpatient medical services according to a fixed, predetermined formula called the prospective payment system (PPS). The PPS is complicated, but the relevant portion of it is relatively straightforward. The Medicare Act (Title XVIII of the Social Security Act) requires the Secretary to adjust reimbursements to account for any differences in the cost of labor in a given area. Section 1886(d)(3)(E)(i) provides:

the Secretary shall adjust the proportion, (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs, of the ... prospective payment rates ... for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level.

42 U.S.C. § 1395ww(d)(3)(E)(i) (emphasis added). The Center for Medicare and Medicaid Services (CMS) determines the hospitals' labor costs by examining, through a fiscal intermediary, yearly reports submitted by the hospitals. 42 C.F.R. § 413.24. The reporting process is complex, and CMS maintains a Provider Reimbursement Manual (PRM) derived from 42 C.F.R. § 413.24 and based on Generally Accepted Accounting Principles that provides step-by-step guidance on how to report costs. The rulemaking announcing the wage index specifically references and incorporates the relevant sections of the PRM. See, e.g.,73 Fed.Reg. 48434, 48581–48582 (Aug. 19, 2008).


CMS aggregates the reported data to determine both the “proportion”—the average cost of labor of all hospitals nationwide—and the “factor”—the average cost of labor in a given area—both expressed as an average hourly wage; the “factor” is what CMS refers to as the wage index. The D.C. Circuit, in

[766 F.3d 565]

Methodist Hospital of Sacramento v. Shalala, provides a good description of the process:

The wage index reflects a [statutory] requirement ... that the federal rate be adjusted to reflect geographic variations in labor costs. The area wage indexes for each region are based on wage-cost data periodically submitted by Medicare hospitals across the country. The indexes are used at two points in the prospective payment rate calculation. First, regional wage indexes are used (along with other factors, such as inflation and hospital case-mix ratios) to modify and standardize the data used to establish the nationwide “federal rate.” Second, once the federal rate has been set, the wage indexes are used to make regional adjustments to the labor-related portion of the federal rate. Because each wage index is used to develop the base national rate as well as to adjust that rate by region, a change in any single wage index can affect the reimbursement rate of each hospital in the country.

38 F.3d 1225, 1227–28 (D.C.Cir.1994) (citations omitted). In addition, the total national amount of reimbursements is fixed; the wage indices determine how the pie is divided but cannot alter the size of the pie itself. 42 U.S.C. § 1395ww(d)(3)(D).


The wage index has three components: “wages,” “paid hours,” and “wage-related costs,” all of which are reported pursuant to the PRM. “Wages” are determined by taking the dollar value of every hour the hospital paid its employees. “Paid hours” are the actual hours associated with an employee's wages rather than simply the amount of time an employee spent working at the hospital; for example, paid hours includes “paid lunch hours” and “paid holiday, vacation, and sick leave hours.” PRM § 3605.2; see also Adventist GlenOaks Hosp. v. Sebelius, 663 F.3d 939, 942 (7th Cir.2011). “Wage-related costs” are essentially fringe benefits, like health insurance and retirement plans, and are not linked to paid hours. See59 Fed.Reg. 45330, 45356–57 (Sept. 1, 1994); see also73 Fed.Reg. at 48581–48582. So, under this “paid hours” approach to determining wages, paid time off (PTO) like paid sick time, paid vacation, and paid lunch time are all accounted for as wages (e.g., the dollar value of the amount of paid sick leave an employee took) and paid hours (e.g., the amount of time the employee was out sick).

To understand why these categories matter, consider a simplified version of the formula used to calculate a region's index: (wages + wage-related costs)/ (paid hours). See68 Fed.Reg. 45346, 45396–45397 (Aug. 1, 2003); see also58 Fed.Reg. 46270, 46299 (Sept. 1, 1993); 73 Fed.Reg. at 48582–83. Note that paid hours are in the denominator: The more paid hours a hospital has to report, the lower its region's index; the lower the index, the less money the hospital makes from inpatient services. A given hospital (or group of hospitals in the same region) would therefore prefer to report as few paid hours as possible. One way to do this is to treat something as a “wage-related” cost rather than a “wage” cost because only wage costs are tied to paid hours. At the very least, the hospital would not want to report something as a “wage” that hospitals in other regions report as “wage-related” because it would lower that hospital's index in comparison. Both disputes in this case involve this kind of classification issue.

II. JURISDICTION AND STANDARDS OF REVIEW

We have jurisdiction pursuant to

[766 F.3d 566]

28 U.S.C. § 1291. The Secretary's decision 1 is reviewed de novo. Battle Creek Health Sys. v. Leavitt, 498 F.3d 401, 408 (6th Cir.2007). The Administrative Procedure Act governs the scope and substance of our review of the Secretary's actions. 5 U.S.C. §§ 701– 706. If, as here, the Secretary's decision depends in part on her construction of the Medicare Act, we determine what level of deference to afford the Secretary's construction and then whether the Secretary exceeded her “statutory ... authority.” Id. § 706(2)(C). And we evaluate the Secretary's reasoning to determine whether it was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Id. § 706(2)(A).

A. Statutory Interpretation: Chevron and Skidmore

The parties agree that the Secretary's interpretation of the wage index involves a question of statutory interpretation under the rule of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842–44, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), rather than the less-deferential rule of Skidmore v. Swift & Co., 323 U.S. 134, 140, 65 S.Ct. 161, 89 L.Ed. 124 (1944). Practically speaking, “in cases such as those involving Medicare or Medicaid, in which CMS, ‘a highly expert agency[,] administers a large complex regulatory scheme in cooperation with many other institutional actors, the various possible standards for deference’—namely, Chevron and Skidmore—‘begin to converge.’ ” Estate of Landers v. Leavitt, 545 F.3d 98, 107 (2d Cir.2008) (quoting Cmty. Health Ctr. v. Wilson–Coker, 311 F.3d 132, 138 (2d Cir.2002)). There are, however, real differences between the two standards.

Chevron and its related cases provide a two-step framework to resolve questions of statutory construction when they arise in the administrative context. See5 U.S.C. §§ 706(2)(A), (C). The court first determines whether “Congress has directly spoken to the precise question at issue.” Chevron, 467 U.S. at 842, 104 S.Ct. 2778. If the court can discern “the unambiguously expressed intent of Congress,” then that construction of the statute controls. Id. at 843, 104 S.Ct. 2778. But if the statute is ambiguous on the precise question at issue, the court must next determine whether Congress has either expressly or implicitly delegated authority to the agency to fill the gap—that is, to “elucidate a specific provision of the statute by regulation.” Id. at 843–44, 104 S.Ct. 2778. If the delegation is express, the agency's “legislative regulations”...

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