Albany General Hosp. v. Heckler, Civ. No. 83-851-FR.

• Decision Date: 02 March 1984
• Docket Number: Civ. No. 83-851-FR.
• Citation: 584 F. Supp. 614
• Parties: ALBANY GENERAL HOSPITAL, Ashland Community Hospital, Bay Area Hospital, Douglas Community Hospital, Eastmoreland General Hospital, Forest Glen Hospital, Good Samaritan Hospital, Grand Ronde Hospital, Holladay Park Hospital, Lebanon Community Hospital, Merle West Medical Center, Newberg Community Hospital, Providence Hospital, Rogue Valley Memorial Hospital, Sacred Heart General Hospital, St. Vincent Hospital, Salem Hospitals, The Dalles General Hospital, Western Lane Hospital, Plaintiffs, v. Margaret HECKLER, Secretary of the Department of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Oregon

584 F. Supp. 614

ALBANY GENERAL HOSPITAL, Ashland Community Hospital, Bay Area Hospital, Douglas Community Hospital, Eastmoreland General Hospital, Forest Glen Hospital, Good Samaritan Hospital, Grand Ronde Hospital, Holladay Park Hospital, Lebanon Community Hospital, Merle West Medical Center, Newberg Community Hospital, Providence Hospital, Rogue Valley Memorial Hospital, Sacred Heart General Hospital, St. Vincent Hospital, Salem Hospitals, The Dalles General Hospital, Western Lane Hospital, Plaintiffs, v. Margaret HECKLER, Secretary of the Department of Health and Human Services, Defendant.

Civ. No. 83-851-FR.

United States District Court, D. Oregon.

March 2, 1984.

Thomas E. McDermott, Thomas A. Balmer, Lindsay, Hart, Neil & Weigler, Portland, Or., for plaintiffs.

Charles H. Turner, U.S. Atty., Jack G. Collins, Chief, Civil Div., Portland, Or., Jeanne Schulte Scott, Washington, D.C., for defendant.

OPINION AND ORDER

FRYE, Judge:

Plaintiffs, various community hospitals throughout the State of Oregon, seek a declaration by way of a motion for summary judgment that the "Malpractice Rule," 42 C.F.R. 405.452(b)(1)(ii) is invalid on the following grounds:

a) it was promulgated in violation of the Administrative Procedure Act (APA) 5 U.S.C. § 553; and

b) it is arbitrary, capricious, an abuse of discretion, and not in accordance with law, in violation of 5 U.S.C. § 706; and

c) it is contrary to the substantive provisions of the Medicare Act, 42 U.S.C. § 1395f.

Plaintiffs also seek reimbursement for malpractice premiums heretofore paid on the basis of the reimbursement regulations as they existed prior to the adoption of the "Malpractice Rule."

Defendant, Secretary of Health and Human Services, has filed a cross-motion for summary judgment and a motion to dismiss.¹ The parties agree that the facts are undisputed and that the case is ready for disposition.

Eight federal district courts have already ruled on this matter. Four courts have invalidated the regulation. See Mt. Carmel Mercy Hospital v. Heckler, 581 F.Supp. 1311 (E.D.Mich.1983); Abington Memorial Hospital v. Heckler, 576 F.Supp. 1081 (E.D.Pa.1983); Chelsea Community Hospital v. Heckler, No. 83CV-6126-AA (E.D.Mich. Dec. 20, 1983); St. James Hospital v. Heckler, 579 F.Supp. 757 (N.D.Ill. 1984). Four courts have upheld the regulation. See Athens Community Hospital v. Heckler, 565 F.Supp. 695 (E.D.Tenn.1983), appeal docketed, No. 83-5546 (6th Cir. Aug. 5, 1983); Cumberland Medical Center v. Heckler, 578 F.Supp. 39 (M.D. Tenn.1983), appeal docketed, No. 83-5549 (6th Cir. Aug. 9, 1983); Humana of Aurora, Inc. v. Heckler, No. 83-7-70 (D.Colo. Sept. 19, 1983), appeal docketed, No. 83-2417 (10th Cir. Nov. 4, 1983); Walter O. Boswell Memorial Hospital v. Heckler, 573 F.Supp. 884 (D.D.C.1983), appeal docketed, No. 83-2223 (D.C.Cir. Dec. 2, 1983). Five substantive opinions have been written. Judges Fullam, DeMascio, and Will have written opinions which declare the "Malpractice Rule" invalid and contrary to law. Judges Taylor and Bryant have written opinions which declare the Rule valid and pursuant to law.² These judges have described the basic facts concerning the dispute between health care providers and the Secretary regarding this Rule. However, in order that this court's ruling may be understood, the court will set out the undisputed facts underlying this action.³

UNDISPUTED FACTS

This lawsuit arises under title XVIII of the Social Security Act (the Act), commonly known as the "Medicare" program, P.L. 89-97, codified at 42 U.S.C. §§ 1395 et seq. This legislation, enacted in 1965, provides for federal reimbursement for medical care for the aged. It consists of two basic components. However, only Part A, which provides hospital benefits to the elderly, 42 U.S.C. §§ 1395c—1395i-2, is at issue here.

The hospital benefits provided under Part A are funded out of Social Security taxes, 42 U.S.C. § 1395i. Hospitals are reimbursed by the government for their reasonable and necessary costs in providing covered services to Medicare beneficiaries or, if lower, for the customary charges for such services.

Prior to the issuance of the "Malpractice Rule," which is the focus of the dispute here, Medicare reimbursed hospitals for the cost of malpractice insurance based upon the ratio of Medicare patient utilization of the hospital's services to total patient utilization. Under this "utilization" method of apportionment, which is the basic standard for most Medicare reimbursement, all of a hospital's "allowable" costs are assigned to particular cost centers, of which there are two types: (a) revenue-producing, and (b) non-revenue-producing. Non-revenue-producing cost centers supply services for which patients are not billed. These costs are frequently referred to as overhead costs. Housekeeping and dietary services are examples of non-revenue-producing cost centers. By contrast, a patient is specifically billed for services furnished by a revenue-producing cost center. The radiology department, operating room, and laboratory are examples of revenue-producing cost centers. The costs in non-revenue-producing cost centers, including those accumulated in the General and Administrative (G & A) cost center, are then allocated to the revenue-producing cost centers. Once allocated to a revenue-producing cost center, the total costs in each center are then apportioned to determine the proportion of costs that Medicare beneficiaries must pay, based upon the percentage of total services in that cost center utilized by Medicare patients. As the court noted above, this is the method used to determine the cost of malpractice insurance attributable to Medicare patients and for which the hospitals were reimbursed by the Secretary prior to the adoption of the "Malpractice Rule."

Alarmed by increases in the cost of hospital malpractice insurance premiums, the Medicare Bureau began in 1975 to review the issue of malpractice insurance costs. The Medicare Bureau concluded that Medicare's share of a hospital's cost of malpractice insurance was extremely high in comparison with the amount of malpractice awards actually paid on claims filed by Medicare patients.

In 1976 the then department of Health, Education and Welfare (HEW) examined statistics cited in the Report of the Secretary's Commission on Medical Malpractice, a comprehensive study conducted in 1973, which indicated that when malpractice claims were categorized by source of health care coverage, only 12.9% of these claims originated with patients eligible for Medicare or Medicaid benefits. The Report also showed that because Medicare and Medicaid patients were older, often disabled, and of lower economic status, with minimal loss of income, the amounts paid to them as damages for hospital malpractice were less than the amounts paid to other patients. The Medicare Bureau again concluded that it was paying a significantly disproportionate share of the costs of hospital malpractice insurance, because hospitals were exposed to an extremely low level of potential malpractice loss from Medicare beneficiaries in comparison to that occasioned by the treatment of other patients.

Based upon this evidence, HEW asked that an already contracted study of the malpractice insurance problem be expanded to include a survey of medical malpractice claims closed during 1976. The study was conducted by an independent contractor, Westat, Inc. This study included data as to source of payment for the medical and hospital services giving rise to closed malpractice claims, i.e., Medicare, Medicaid, Blue Cross, commercial insurance, etc., and the amount of actual hospital malpractice loss payment in each category.

In January, 1978, the Administrator of the Health Care Financing Administration (HCFA), the component of the Department which administers the Medicare program, sent a memorandum to the Undersecretary of HEW accompanied by an option paper that suggested a number of specific proposals for changes in Medicare reimbursement. Included among these proposals was one that was substantially similar to the current "Malpractice Rule."

In the early part of 1978, the Department received a copy of the report from Westat. This study showed that during the period covered by the report, Medicare patients were responsible for only 5.1% of the total malpractice awards. The results of this study were interpreted by HEW to mean that Medicare was paying a substantially disproportionate share of the costs of hospital...