Lawrence + Mem'l Hosp. v. Burwell

• Citation: 812 F.3d 257
• Decision Date: 04 February 2016
• Docket Number: Docket No. 15–164–cv.
• Parties: LAWRENCE + MEMORIAL HOSPITAL, Plaintiff–Appellant, v. Sylvia Mathews BURWELL, Secretary, Department of Health and Human Services, Marilyn Tavenner, Administrator, Centers for Medicare and Medicaid Services, Robert G. Eaton, Chairman, Medicare Geographic Classification Review Board, Defendants–Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

812 F.3d 257

LAWRENCE + MEMORIAL HOSPITAL, Plaintiff–Appellant,

v.Sylvia Mathews BURWELL, Secretary, Department of Health and Human Services, Marilyn Tavenner, Administrator, Centers for Medicare and Medicaid Services, Robert G. Eaton, Chairman, Medicare Geographic Classification Review Board, Defendants–Appellees.

Docket No. 15–164–cv.

United States Court of Appeals, Second Circuit.

Argued: Nov. 4, 2015.

Decided: Feb. 4, 2016.

Joseph D. Glazer, Law Office of Joseph D. Glazer, P.C., Princeton, NJ ( Steven M. Basche, Law Offices of Steven M. Basche, LLC, on the brief), for Plaintiff–Appellant.

Carolyn Ikari, Assistant United States Attorney, Hartford, CT (Marc H. Silverman, of counsel, on the brief), Assistant United States Attorney, for Deirdre M. Daly, United States Attorney for the District of Connecticut, for Defendants–Appellees.

Before HALL and LYNCH, Circuit Judges, and RAKOFF, District Judge.^*

RAKOFF, District Judge:

Under the Medicare Act, a hospital's classification as "rural" or "urban" may affect the amount of reimbursement that the hospital receives for providing medical services, as well as the hospital's access to certain medical programs. But a hospital can reasonably be viewed as "rural" in some respects (e.g., it is situated in a rural area and attends to the needs of a rural population) and "urban" in other respects (e.g., it needs to attract trained staff from nearby urban areas and to do so must pay urban wage rates). To accommodate this possibility, the Medicare statute, through a complicated classification process, permits a hospital to be classified as urban for some purposes and rural for others. One such statutory provision, 42 U.S.C. § 1395ww(d)(8)(E) —commonly referred to as part of "Section 401"¹ —permits some hospitals that are geographically located in an urban area to be designated as rural "[f]or purposes of this subsection," i.e., subsection (d). They may be able to obtain certain benefits, such as easier access to a more favorable drug pricing program, that would not ordinarily be available to them if they were treated as urban. However, another provision of the same subsection (d), specifically, 42 U.S.C. § 1395ww(d)(10), creates a process by which a Medicare Geographic Classification Review Board ("MGCRB") can redesignate hospitals to a different area from that to which they have been otherwise designated, in order to receive a different wage reimbursement rate. The result is that a hospital that is classified as "rural" in order to obtain favorable drug pricing can contemporaneously apply to be designated to an urban area for wage reimbursement purposes.

Notwithstanding these statutory provisions, in 2000 the Secretary of Health and Human Services (the "Secretary") issued a regulation, known as the "reclassification rule," 42 C.F.R. § 412.230(a)(5)(iii), which provided that a hospital that has been reclassified from urban to rural under subsection (d)(8)(E) may not thereafter receive an additional reclassification by the MGCRB for reclassification as urban under subsection (d)(10). Because the regulation contravenes the plain language of the statute, it exceeds the Secretary's authority and must be held invalid, for the reasons stated below.

We begin, as we must, with the text of the statute. The Medicare Act—Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. —provides for hospitals to be reimbursed for serving Medicare beneficiaries. See 42 U.S.C. § 1395(f) ; Bellevue Hosp. Ctr. v. Leavitt, 443 F.3d 163, 168 (2d Cir.2006). Hospitals' reimbursements are calculated based on rates that are prospectively determined for a fiscal year, not on the hospitals' actual costs. See 42 U.S.C. § 1395ww(d) ; Bellevue, 443 F.3d at 168. To calculate these rates, the Secretary first establishes a nationwide standardized rate for hospitals located in urban or rural areas. See 42 U.S.C. § 1395ww(d)(2)(A)–(D). Hospitals are initially classified to urban or rural areas based on their geographical location. See 42 U.S.C. § 1395ww(d)(2)(D). The Secretary then multiplies the standardized rate by a "wage index" that accounts for geographical variation in wage-related costs. See 42 U.S.C. §§ 1395ww(d)(2)(H), (3)(E). The "wage index" reflects the relationship between the local average of hospital rates and the relevant national average. See 42 U.S.C. §§ 1395ww(d)(2)(H), (3)(E).

As initially promulgated, however, this reimbursement determination system "yielded inequitable results for some hospitals," for example when "a hospital in one area competed for the same labor pool as hospitals in a nearby, larger urban area but received a lower reimbursement" based on its geographical area's wage index. Robert Wood Johnson Univ. Hosp. v. Thompson, 297 F.3d 273, 276 (3d Cir.2002). Therefore, Congress in 1989 amended the Medicare Act to create the MGCRB. See Pub.L. No. 101–239, § 6003(h) (codified at 42 U.S.C. § 1395ww(d)(10) ). The MGCRB considers hospitals' applications to "change the hospital's geographic classification for purposes of determining" the hospital's average standardized reimbursement amount or wage index. 42 U.S.C. § 1395ww(d)(10)(C)(i).

Pursuant to the Medicare statute, see 42 U.S.C. § 1395ww(d)(10)(D)(i), the Secretary publishes guidelines for the MGCRB's use in making reclassification decisions. See 42 C.F.R. § 412.230 et seq. According to these guidelines, a hospital must generally meet three criteria to obtain an MGCRB reclassification. First, the hospital must demonstrate proximity to the area to which it seeks redesignation (within 15 miles for an urban hospital and 35 miles for a rural hospital). See 42 C.F.R. § 412.230(b)(1). Second, the hospital must show that its wages meet certain benchmarks relative to the wages of the area to which it seeks redesignation (84% for an urban hospital and 82% for a rural hospital). See 42 C.F.R. § 412.230(d)(1)(iv)(E). Third, the hospital must demonstrate that its wages meet certain benchmarks relative to the wages of its existing classification area (108% for an urban hospital and 106% for a rural hospital).See 42 C.F.R. § 412.230(d)(1)(iii)(C). Therefore, a hospital's ability to reclassify through the MGCRB process may (though need not) be affected by its designation as "urban" or "rural."

Furthermore, a rural hospital is eligible to be treated as a Rural Referral Center ("RRC") pursuant to another provision of the Medicare statute, see 42 U.S.C. § 1395ww(d)(5)(C)(i). The RRC program was established to "take into account the special needs" of certain rural hospitals, such as high-volume institutions. See id. Hospitals with RRC status are exempted from the proximity requirement of the MGCRB process, see 42 C.F.R. § 412.230(a)(3)(i), and any hospital that "was ever" an RRC is exempt from the requirement that its wages meet certain benchmarks relative to those of its existing classification area. See 42 C.F.R. § 412.230(d)(3)(i).

Particularly relevant to this case is the fact that RRCs more easily qualify for preferable drug pricing. The 340B Drug Discount Program, enacted by Section 602 of the Veterans Health Care Act of 1992, Pub.L. 102–585, 42 U.S.C. § 256b, enables certain hospitals to buy covered outpatient drugs at favorable prices. Since 2010, a rural hospital that qualifies as an RRC may more readily access the 340B Drug Discount Program. Patient Protection and Affordable Care Act, Pub.L. 111–148, § 7101, 124 Stat. 821 –22 (2010). Specifically, a hospital's "disproportionate share adjustment percentage," which is based on the percentage of low-income patients that a hospital serves, must generally be 11.75% in order for a hospital to participate in the 340B Drug Discount Program, see 42 U.S.C. § 256b(a)(4)(L)(ii) ; but an RRC is eligible to participate in the 340B Drug Discount Program if its disproportionate share adjustment percentage is as low as 8%, see 42 U.S.C. § 256b(a)(4)(O). The classification of a hospital as an RRC (which in turn requires the hospital to be classified as rural) may therefore permit an otherwise ineligible hospital to participate in the 340B Drug Discount Program. And, any such hospital may retain its RRC status even after reclassification to an urban wage index area. Cf. Medicare Program: Geographical Classification Review Board; Procedures and Criteria, 55 Fed.Reg. 36754, 36760 (Sept. 6, 1990) ("A hospital that is reclassified from a rural or other urban area only for purposes of the wage index is not considered urban for any other purpose than its labor market area designation.")

While the MGCRB process provides a mechanism for hospitals-urban or rural-to seek reclassification to areas with higher wage indices (often, nearby urban areas), another amendment to the Medicare statute permits certain hospitals geographically located in urban areas to be designated as rural for other purposes. This amendment was enacted in 1999 as Section 401 of the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Pub.L. No. 106–113 ("Section 401").² Section 401(a), the provision of Section 401 most here at issue, is codified at 42 U.S.C. § 1395ww(d)(8)(E) and reads in full:

(a) IN GENERAL.—Section 1886(d)(8) (42 U.S.C. 1395ww(d)(8) ) is amended by adding at the end the following new subparagraph:

(E)(i) For purposes of this subsection, not later than 60 days after the receipt of an application (in a form and manner determined by the Secretary) from a subsection (d) hospital described in clause (ii), the Secretary shall treat the hospital as being located in the rural area (as defined in paragraph (2)(D)) of the State in which the hospital is located.

(ii) For purposes of clause (i), a subsection (d) hospital described in this clause is a subsection (d) hospital that is located in an urban area (as defined in paragraph (2)(D)) and satisfies any of the following criteria:

(I) The hospital is located in a rural census tract of a metropolitan statistical area (as determined under the most recent modification of the

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