Abraham Lincoln Memorial Hosp. v. Sebelius

• Decision Date: 16 October 2012
• Docket Number: No. 11–2809.,11–2809.
• Citation: 698 F.3d 536
• Parties: ABRAHAM LINCOLN MEMORIAL HOSPITAL, et al., Plaintiffs–Appellants, v. Kathleen SEBELIUS, Secretary of Health and Human Services, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

698 F.3d 536

ABRAHAM LINCOLN MEMORIAL HOSPITAL, et al., Plaintiffs–Appellants,

v.Kathleen SEBELIUS, Secretary of Health and Human Services, Defendant–Appellee.

No. 11–2809.

United States Court of Appeals,

Seventh Circuit.

Argued Jan. 6, 2012.

Decided Oct. 16, 2012.

Paul R. Bown, Attorney, Brown, Hay & Stephens, Springfield, IL, Thomas Wayne Coons (argued), Carel Theilgard Hedlund, Attorneys, Ober, Kaler, Grimes & Shriver, Baltimore, MD, for Plaintiffs–Appellants.

Peter R. Maier (argued), Attorney, Department of Justice, Civil Division, Appellate Staff, Washington, DC, for Defendant–Appellee.

Before MANION and WILLIAMS, Circuit Judges, and CASTILLO, District Judge.^*

CASTILLO, District Judge.

In a ruling constituting the final administrative decision of the Secretary of the Department of Health and Human Services (“HHS”), the Administrator of the Centers for Medicare and Medicaid Services (“CMS”) disallowed the reimbursement of Medicare expenses to a group of Illinois hospitals for their 2004 and 2005 cost years. Specifically, the Administrator found that the amount of a tax assessment paid by the hospitals pursuant to an Illinois statute was a reasonable cost, but was subject to offset by any payments those hospitals received from an Illinois State fund. Plaintiffs-appellants, nineteen hospitals (“Hospitals”),¹ appeal from the district court's decision upholding the Administrator's decision. Because the Administrator's decision was not arbitrary or capricious and is supported by substantial evidence, we affirm the district court's well-reasoned and comprehensive opinion which granted summary judgment in favor of the Secretary.

I. BACKGROUND

The issues presented in this appeal require an understanding of the complex and technical Medicare and Medicaid programs. As one of our sister circuits has commented, the statutes and provisions in question “are among the most completely impenetrable texts within human experience. Indeed, one approaches them at the level of specificity herein demanded with dread, for not only are they dense reading of the most tortuous kind, but Congress also revisits the area frequently, generously cutting and pruning in the process and making any solid grasp of the matters addressed merely a passing phase.” Rehab. Ass'n of Va. v. Kozlowski, 42 F.3d 1444, 1450 (4th Cir.1994). Accordingly, we begin with a detailed discussion of the Medicare and Medicaid programs and certain of the provisions that are relevant to this appeal.

A. Medicare

Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., known as the Medicare Act, “is a federally-subsidized health insurance program primarily for elderly and disabled individuals.” Michael Reese Hosp. and Med. Ctr. v. Thompson, 427 F.3d 436, 438 (7th Cir.2005). The Medicare Act divides benefits into four parts. The parties agree that this appeal concerns Part A of the program, which provides hospital insurance benefits for inpatient services, and Part B, which provides supplementary medical insurance benefits to cover, among other things, outpatient services. 42 U.S.C. §§ 1395c–1395i–5 (Part A); 42 U.S.C. §§ 1395j–1395w–5 (Part B).

Medicare “is administered, in part, through contractual arrangements with providers of health care services.” Adventist Living Ctrs. v. Bowen, 881 F.2d 1417, 1419 (7th Cir.1989) (citing 42 U.S.C. § 1395cc). Under the Medicare Act, health care providers are entitled to reimbursement for the “reasonable cost” of medical services they provide to Medicare beneficiaries. 42 U.S.C. § 1395f(b)(1); 42 C.F.R. § 413.9(a). To obtain reimbursement, health care providers submit cost reports at the end of their fiscal year to a fiscal intermediary, detailing the cost of services and amount of reimbursement a participating provider believes it is due. 42 C.F.R. §§ 413.20(b) and 413.24; Little Co. of Mary Hosp. v. Sebelius, 587 F.3d 849, 851 (7th Cir.2009). The fiscal intermediary then reviews the cost reports, determines the amount of payments to be made to providers and issues a notice of program reimbursement. 42 C.F.R. § 405.1803; see also Little Co. of Mary Hosp., 587 F.3d at 851. A provider that is dissatisfied with the fiscal intermediary's decision may request a hearing by the Provider Reimbursement Review Board (“Board”), an administrative body appointed by the Secretary. 42 U.S.C. § 1395 oo(a), (h); 42 C.F.R. § 405.1835. Once the Board issues a ruling, the Secretary may affirm, modify, or reverse that decision. 42 U.S.C. § 1395 oo(f)(1); 42 C.F.R. § 405.1871(b)(1). The Secretary has authorized the Administrator of CMS to act on her behalf in reviewing Board decisions. 42 C.F.R. § 405.1875. The Administrator's review of a Board decision is considered the final decision of the Secretary. Id. Providers who are unsatisfied with the Secretary's final decision may challenge the decision in federal district court. 42 U.S.C. § 1395(f).

Again, under the Medicare Act, participating health care providers are reimbursed for the “reasonable cost” of providing services to Medicare beneficiaries. 42 U.S.C. § 1395f(b)(1). “Reasonable costs” are defined as:

the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services, and 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[.]

42 U.S.C. § 1395x(v)(1)(A) (emphasis added). This statutory definition, which explicitly requires the Secretary to reimburse providers for the costs they “actually incur” reflects “the Medicare program's statutory policy of paying only for a provider's net costs.” Abbott–Northwestern Hosp., Inc. v. Schweiker, 698 F.2d 336, 339 (8th Cir.1983); see also Mem'l Hosp. of Carbondale v. Heckler, 760 F.2d 771, 781 (7th Cir.1985) (noting that the income offset approach “clearly serves the purpose of the Medicare Act which limits reimbursement to costs actually incurred by the provider”) (quoting Cheshire Hosp. v. New Hampshire–Vermont Hospitalization Serv., Inc., 689 F.2d 1112, 1119 (1st Cir.1982)).

Pursuant to her statutory authority, “[t]he Secretary has promulgated ... regulations establishing the methods for determining reasonable cost reimbursement.” Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 92, 115 S.Ct. 1232, 131 L.Ed.2d 106 (1995). Consistent with the statute, these regulations provide that “[a]ll payments to providers of services must be based on the reasonable cost of services covered under Medicare and related to the care of beneficiaries.” 42 C.F.R. § 413.9(a). Reasonable costs are defined as those “necessary and proper costs incurred in furnishing services[.]” Id. As relevant here, the regulations address some situations where a health care provider must account for the receipt of any refunds, rebates, credits, or discounts by offsetting or reducing the costs to which they relate so as to appropriately reflect the costs actually incurred. Specifically, the regulations provide that “refunds of previous expense payments are reductions of the related expense.” 42 C.F.R. § 413.98(a). Refunds are defined as “amounts paid back or a credit allowed on account of an overcollection.” 42 C.F.R. § 413.98(b)(3) (emphasis added). The regulations further clarify that the true cost of goods or services “is the net amount actually paid for them” and that “refunds of previous expense payments are clearly reductions in costs and must be reflected in the determination of allowable costs.” 42 C.F.R. § 413.98(d).

In addition to the regulations, the Secretary also publishes the Provider Reimbursement Manual (“Manual”) which provides guidance in interpreting the regulations. Mem'l Hosp. of Carbondale, 760 F.2d at 772;Guernsey Mem'l Hosp., 514 U.S. at 101–02, 115 S.Ct. 1232 (referring to the Manual provisions as interpretive rules). While the Manual “is entitled to ‘considerable deference’ as a general matter[,]” Daviess Cnty. Hosp. v. Bowen, 811 F.2d 338, 345 (7th Cir.1987) (citing Bedford Med. Ctr. v. Heckler, 766 F.2d 321, 323 (7th Cir.1985)), it is not strictly binding on the Secretary and “we will uphold a decision despite certain variations from the [M]anual.” Paragon Health Network, Inc. v. Thompson, 251 F.3d 1141, 1147 (7th Cir.2001).

At the time the Hospitals submitted their cost reports to the Intermediary, the Manual provided that “[t]he general rule is that taxes assessed against the provider ... are allowable costs.” Manual § 2122.1 (Rev. 205).² The Manual also provides a list of taxes that are not allowable as costs, such as sales taxes or taxes on property that are not used in rendering covered services. Manual § 2122.2 (Rev. 215).³ Notably, health care provider taxes were not, and are not currently included, among the list of taxes that are not allowed.

Consistent with the regulations, the Manual provides that “refunds of previous expense payments are reductions of the related expense.” Manual § 800 (Rev. 450). The Manual further instructs that “[d]iscounts, allowances, refunds, and rebates ... should be used to reduce the specific costs to which they apply [.]” Manual § 804 (Rev. 45).⁴ The Manual defines refunds as “amounts paid back by the vendor generally in recognition of damaged shipments, overpayments, or returned purchases.” Manual § 802.31 (Rev. 450). The Manual also defines “Applicable Credits” as “[t]hose receipts or types of transactions which offset or reduce expense items that are allocable to cost centers as direct or indirect costs. Typical examples of such transactions are: purchase discounts, rebates, or allowances; recoveries or indemnities on losses; sales of scrap or incidental services; adjustments of overpayments or erroneous charges; and other income items which serve to reduce costs.” Manual § 2302.5 (Rev. 336).

B. Medicaid

Title XIX of the Social Security Act, 42 U.S.C. §...