Anna Jaques Hosp. v. Sebelius

• Decision Date: 11 September 2009
• Docket Number: No. 08-5529.,No. 08-5407.,08-5407.,08-5529.
• Citation: 583 F.3d 1
• Parties: ANNA JAQUES HOSPITAL, Et Al., Appellees v. Kathleen SEBELIUS, In her Official Capacity as Secretary of the United States Department of Health and Human Services, Appellant.
• Court: U.S. Court of Appeals — District of Columbia Circuit

583 F.3d 1

ANNA JAQUES HOSPITAL, Et Al., Appellees v. Kathleen SEBELIUS, In her Official Capacity as Secretary of the United States Department of Health and Human Services, Appellant.

No. 08-5407.

No. 08-5529.

United States Court of Appeals, District of Columbia Circuit.

Argued May 8, 2009.

Decided September 11, 2009.

Appeals from the United States District Court for the District of Columbia, (No. 1:05-cv-00625).

Stephanie R. Marcus, Attorney, U.S. Department of Justice, argued the cause for appellant. With her on the briefs were Michael F. Hertz, Acting Assistant Attorney General, Jeffrey A. Taylor, U.S. Attorney, and Mark B. Stern, Attorney. R. Craig Lawrence, Assistant U.S. Attorney, entered an appearance.

Ankur J. Goel argued the cause for appellees. With him on the brief were M. Miller Baker and Kelly M. Falls.

Before: HENDERSON, TATEL, and GRIFFITH, Circuit Judges.

Opinion for the Court filed by Circuit Judge GRIFFITH.

GRIFFITH, Circuit Judge:

The Secretary of the Department of Health and Human Services appeals the decision of the district court that she improperly excluded the labor costs of certain types of hospitals from her calculation of Medicare reimbursements due to appellees. Because we conclude that the Secretary's exclusion of these costs was based on a reasonable interpretation of her statutory authority, we reverse the judgment of the district court.

I.

In 1983, Congress created the Prospective Payment System (PPS) as a new means to provide Medicare reimbursements to hospitals for medical care requiring at least one night's stay. See Social Security Amendments of 1983, Pub.L. No. 98-21, § 601, 97 Stat. 65, 149; see also Se. Ala. Med. Ctr. v. Sebelius, 572 F.3d 912, 914-15 (D.C.Cir.2009) (describing how the PPS works); Transitional Hosps. Corp. of La. v. Shalala, 222 F.3d 1019, 1020-21 (D.C.Cir.2000) (same). Hospitals that participate in the PPS are called "subsection (d) hospitals," named after the statutory provision that identifies them. See 42 U.S.C. § 1395ww(d)(1)(B) (2006). These facilities are best described as "short-term acute care general hospitals." Transitional Hosps., 222 F.3d at 1021 (quoting S.REP. No. 98-23, at 54 (1983), reprinted in 1983 U.S.C.C.A.N. 143, 194). Of relevance to this appeal, critical access hospitals, which are usually located in rural areas and have fewer than twenty-five beds, are excluded from subsection (d) and receive Medicare reimbursements under a payment scheme different from the PPS. See 42 U.S.C. § 1395x(e), (mm); Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2004 Rates, 68 Fed.Reg. 27,154, 27,190 (May 19, 2003) [hereinafter Proposed FY 2004 Rates].

Under the PPS, a significant component of the Medicare payment subsection (d) hospitals receive is reimbursement for their "wages and wage-related costs." 42 U.S.C. § 1395ww(d)(3)(E)(i). Because these costs vary widely across the country, Congress requires the Secretary to adjust Medicare reimbursements according to "area differences in hospital wage[s]." Id. To do so, the Secretary calculates a wage index for each area (employing the area classification system used by the Office of Management and Budget) by dividing the area's average hourly hospital wage by the national average. See id.; Changes to the Hospital Inpatient Prospective Systems and Fiscal Year 2004 Rates, 68 Fed.Reg. 45,346, 45,398-99 (Aug. 1, 2003) [hereinafter Final FY 2004 Rates]. She uses the wage index—referred to as the "factor" by the statute—to adjust the labor cost component of Medicare reimbursements.

Congress requires the Secretary "at least every 12 months . . . [to] update the factor . . . on the basis of a survey conducted by the Secretary (and updated as appropriate) of the wages and wage-related costs of subsection (d) hospitals in the United States." 42 U.S.C. § 1395ww(d)(3)(E)(i). The Secretary conducts this survey by compiling wage data from cost reports submitted annually by hospitals. See Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2005 Rates, 69 Fed.Reg. 48,916, 49,049 (Aug. 11, 2004) [hereinafter Final FY 2005 Rates]. The Secretary removes data from this survey that fail to meet certain criteria for reasonableness, including data that are "incomplete[,] inaccurate . . ., or otherwise aberrant." Id. at 49,049-50; see also Final FY 2004 Rates, 68 Fed.Reg. at 45,397. From this scrubbed survey, the Secretary calculates each area's proposed wage index. Before putting the wage index in final form, she solicits comments from the public. See Publication of Schedules for Determining Prospective Payment Rates, 42 C.F.R. § 412.8 (2008). Because of the time required to scrub the data, the Secretary calculates each year's wage index using data from the survey conducted three years earlier. See Final FY 2005 Rates, 69 Fed.Reg. at 49,049; Final FY 2004 Rates, 68 Fed.Reg. at 45,397.

Prior to 2003, the Secretary included wage data for facilities that were subsection (d) hospitals during the survey year but were no longer classified as such by the time she calculated the wage index. In May 2003, the Secretary proposed a revision to this approach that would exclude wage data for hospitals that were subsection (d) hospitals during the survey year but became critical access hospitals before the year the index was actually calculated. See Proposed FY 2004 Rates, 68 Fed.Reg. at 27,190. Commenters generally supported removing data for critical access hospitals from the wage index, and the Secretary implemented the proposal. Final FY 2004 Rates, 68 Fed.Reg. at 45,397. One commenter raised the issue that is now the centerpiece of this appeal, arguing that the wage index should include data for facilities that qualified as subsection (d) hospitals at the time of the survey, including those later reclassified as critical access hospitals. Id. The Secretary concluded, however, that inclusion of data for these critical access hospitals has a "substantial negative impact" on the wage index for subsection (d) hospitals because they have "significantly different labor costs." Id. Specifically, "in 89 percent of all labor market areas with hospitals that converted to [critical access] status some time after FY 2000, the average hourly wage for [critical access hospitals] is lower than the average hourly wage for other [subsection (d)] hospitals in the area." Id. The Secretary continued to include wage data for other facilities that converted to non-subsection (d) status, as long as their data met her criteria for reasonableness. Id. She explained, "[W]age data for these hospitals, unlike CAHs, are not necessarily unique compared to other short-term hospitals, and these terminating or converting hospitals provide an accurate reflection of the labor market area." Id. at 45,398.

The Secretary first applied this policy when calculating the FY 2005 wage index. See Final FY 2005 Rates, 69 Fed.Reg. at 49,049. In calculating the wage index for Massachusetts, she excluded labor cost data from two facilities that had become critical access hospitals after 2001, the survey year: Nantucket Cottage Hospital and Martha's Vineyard Hospital. The Secretary also excluded the labor costs of these hospitals from the FY 2006 wage index. See Changes to the Hospital Inpatient Prospective Systems and Fiscal Year 2006 Rates, 70 Fed.Reg. 47,278 (Aug. 12, 2005).

On March 25, 2005, a group of subsection (d) hospitals in Massachusetts filed suit in the district court seeking, among other things, injunctive relief requiring the Secretary to recalculate the FY 2005 wage index using data from facilities that qualified as subsection (d) hospitals in 2001, including Nantucket Cottage Hospital, and to adjust Medicare reimbursements to the Massachusetts hospitals accordingly. The parties filed cross-motions for summary judgment. On February 27, 2008, the district court granted appellees' motion, concluding that the Secretary's interpretation of § 1395ww(d)(3)(E)(i) failed at Chevron step one because the statute requires that the wage index reflect the labor costs of all subsection (d) hospitals whose cost reports were used to conduct the annual survey, regardless of their status at the time the index is calculated. See Anna Jaques Hosp. v. Leavitt, 537 F.Supp.2d 24, 31 (D.D.C.2008). The court also rejected as arbitrary and capricious the Secretary's explanation that the wage data from critical access hospitals and subsection (d) hospitals were so different that they justified her new policy of excluding the former from the wage index. See id. at 34-35. As a remedy, the court ordered the Secretary to recalculate the FY 2005 wage index for Massachusetts using data from all facilities that qualified as subsection (d) hospitals in 2001, including data from Nantucket Cottage Hospital. See Anna Jaques Hosp. v. Leavitt, No. 05-625, at 2 (D.D.C. Feb. 27, 2008) (order accompanying opinion).¹ The Secretary filed a motion for reconsideration, which the district court denied. Anna Jaques Hosp. v. Leavitt, No. 05-625, at 4 (D.D.C. July 15, 2008). In a related lawsuit, appellees also challenged the Secretary's calculation of the FY 2006 wage index for Massachusetts on the same grounds. On November 13, 2008, the district court granted summary judgment for the hospitals in light of its previous decision. Anna Jaques Hosp. v. Leavitt, No. 06-767 (D.D.C. Nov. 13, 2008). The Secretary appealed each decision.

We have jurisdiction to consider this consolidated appeal under 28 U.S.C. § 1291 (2006). "Because the district court entered a summary judgment, we review its decision de novo and therefore, in effect, review directly the decision of the Secretary." St. Luke's Hosp. v. Thompson, 355 F.3d 690, 693 (D.C.Cir.2004) (quoting Lozowski v. Mineta, 292 F.3d 840, 845 (D.C.Cir.2002)).

II.

This appeal turns on three issues raised by the Secretary: (1) whether her interpretation of § 1395ww(d)(3)(E)(i), the statutory...