Appalachian Regional Healthcare, Inc. v. Shalala

Decision Date23 December 1997
Docket NumberNo. 96-5215,96-5215
Citation131 F.3d 1050
Parties, 54 Soc.Sec.Rep.Ser. 659, Medicare & Medicaid Guide P 45,947 APPALACHIAN REGIONAL HEALTHCARE, INC., Appellant, v. Donna E. SHALALA, Secretary of Health and Human Services, Appellee.
CourtU.S. Court of Appeals — District of Columbia Circuit

Appeal from the United States District Court for the District of Columbia (94cv1365).

Joe W. Fleming, II, Washington, DC, argued the cause and filed the briefs for appellant.

Jeffrey G. Micklos, Attorney, United States Department of Health and Human Services, Washington, DC, argued the cause for appellee, with whom Frank W. Hunger, Assistant Attorney General, United States Department of Justice, Mary Lou Leary, United States Attorney, Harriet S. Rabb, General Counsel, United States Department of Health and Human Services, Robert P. Jaye, Acting Associate General Counsel, and Henry R. Goldberg, Deputy Associate General Counsel, were on the brief.

Jeffrey G. Micklos, Attorney, United States Department of Health and Human Services, argued the cause for appellee, with whom Frank W. Hunger, Assistant Attorney General, United States Department of Justice, Mary Lou Leary, United States Attorney, Harriet S. Rabb, General Counsel, United States Department of Health and Human Services, Robert P. Jaye, Acting Associate General Counsel, and Henry R. Goldberg, Deputy Associate General Counsel, were on the brief.

Before: SILBERMAN, SENTELLE, and GARLAND, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

Dissenting opinion filed by Circuit Judge SENTELLE.

SILBERMAN, Circuit Judge:

Appalachian Regional Healthcare contends that the Provider Reimbursement Review Board unreasonably interpreted the Medicare as Secondary Payer provisions of the Social Security Act, 42 U.S.C. § 1395y(b) (1994), in approving the reduction of Appalachian's Medicare reimbursements for the fiscal years ending 1985 through 1991. The district court disagreed, and entered summary judgment in favor of the Secretary of Health and Human Services. We affirm the judgment.

I.

Appalachian Regional Healthcare, Inc., a nonprofit Kentucky corporation, owns and/or operates 10 hospitals in Kentucky, Virginia, and West Virginia. It has entered into Medicare provider agreements with the Secretary of Health and Human Services and its hospitals thus are qualified to receive Part A reimbursement for the inpatient health care services they provide to covered beneficiaries. Appalachian is reimbursed under the Prospective Payment System (PPS) created by section 601 of the Social Security Amendments of 1983, codified at 42 U.S.C. § 1395ww(d) (1994). Although a detailed explanation of this rather complex system is not required here, roughly, PPS requires the Secretary to classify a covered beneficiary's discharge into one of approximately 500 Diagnosis Related Groups (DRG), "based on essential data abstracted from the inpatient bill for that discharge." 42 C.F.R. § 412.60(c) (1996). Reimbursement depends on the DRG to which a patient is assigned and the average cost of treating such a diagnosis, "regardless of the [actual] number of conditions treated or services furnished during the patient's stay." 42 C.F.R. § 412.60(c)(2) (1996). A provider, therefore, is reimbursed the same amount for each similarly classified patient discharge, even if the actual cost of caring for patients in that DRG varies. 1 Until PPS was enacted, providers were reimbursed under a cost-based system, whereby Medicare paid either a hospital's customary charge for or the reasonable cost of a particular item or service, whichever was lower. See Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C.Cir.1994).

Appellant's annual reimbursement is calculated based on the annual cost report it must submit to its so-called "fiscal intermediary," Blue Cross/Blue Shield of Kentucky, which is authorized, as the Secretary's agent, to audit and, if necessary, adjust Appalachian's report. The intermediary thought Appalachian's cost reports for fiscal years ending 1985, 1986, 1987, 1988, 1989, 1990, and 1991 reflected a misreading of section 1862(b) of the Social Security Act, 42 U.S.C. § 1395y(b) (1994), known as the Medicare as Secondary Payer (MSP) provisions, and reduced Appalachian's reimbursement by $1,010,414. 2 It is the Secretary's reading of these provisions in light of the statutory change in method of reimbursement, that gives rise to the parties' dispute.

Section 1862(b)(2) of the MSP provisions forbids the Secretary from making payment under Part A "with respect to any item or service" to the extent that payment has been or reasonably can be expected to be made by a primary payer--other health insurance, such as worker's compensation, an employer group health plan, or liability insurance. During the fiscal years at issue, Appalachian's hospitals provided services to Medicare beneficiaries who were also covered under other health insurance--primarily coal miners covered under the black lung benefits program administered by the Division of Coal Mine Workers Compensation of the United States Department of Labor. The black lung program, however, only pays for those medical services related to pneumoconiosis. Thus, the payments Appalachian received from Labor--which included a markup over cost--were in full satisfaction of the hospitals' charges for only certain items of care, such as pulmonary x-rays or the use of a respirator. Section 1862(b)(2), then, prohibited the Secretary from making payment for those items or services paid for by the black lung program, but was ambiguous as to how the Secretary could keep from doing so under the PPS system.

Appellant thought it was entitled to keep its profit margin on the payments received from the black lung program (and other primary payers); it therefore offset only the portion of those payments representing a hospital's costs against Medicare's PPS reimbursement. Blue Cross/Blue Shield interpreted the MSP provisions to require instead that the entire primary payment be deducted from the total PPS reimbursement that otherwise would have been due the provider. The following example illustrates the difference. Assume that Medicare's PPS reimbursement to Appalachian for having provided six services to a covered beneficiary during an inpatient stay was $20. Assume further that two of those services fell within the coverage of the black lung program, for which Labor paid $15. The intermediary would subtract the full $15 primary payer payment from the $20 PPS payment that would have been made had there been no other insurance, leaving a PPS reimbursement of $5 to be made. Appalachian, however, would offset only that portion of the $15 payment attributable to the hospital's costs against the $20 PPS payment. Using the fiscal year 1987 cost to charge ratio (a number representing a hospital's average markup as determined by the intermediary) for one of Appalachian's 10 hospitals--.658--Appalachian would have multiplied the $15 primary payer payment by the .658 cost to charge ratio, and would deduct the product--$9.87--from the $20 PPS payment, leaving a PPS payment of $10.13 to be made. Under its method, then, Appalachian would be reimbursed $10.13 + $15 = $25.13, placing them in "substantially the same position" with respect to primary payer payments as it was prior to the enactment of PPS. Under the intermediary's approach, by contrast, the provider could never receive more in combined payments than it would have received from Medicare in the absence of other insurance coverage.

Appalachian sought review of the intermediary's adjustments by the Provider Reimbursement Review Board. The Board issued five separate decisions, which were, Appalachian informs us, identical in all material respects, affirming Blue Cross/Blue Shield's adjustments in each fiscal year. The Secretary's delegate, the Administrator of the Health Care Financing Administration, declined to review the Board's decision. Left undisturbed, the Board's decision constituted final agency action reviewable by statute in the district court for the District of Columbia. See 42 U.S.C. § 1395oo(f)(1) (1994).

II.

We note at the outset the limited nature of appellant's claim. Recognizing the statute's ambiguities, Appalachian does not assert that its cost exclusion method is the only permissible way to construe the MSP provisions in this context. 3 Rather, it argues that the Board's reading (in effect, the Secretary's) of those provisions is unreasonable. The operative portion of the Board's decision interpreting the statute is as follows:

The Board finds that § 1862(b)(2) of the Act provides that payment may not be made with respect to any item or service to the extent payment has been made or can reasonably be made from a primary payer. Section 1862(b)(4) of the Act makes provision for coordination of benefits when the payment by a primary payer for an item or service is less than the full charge. The Board finds this permits payment by the Medicare program for the remainder of such charge, but may not exceed the amount Medicare would pay if there were no primary payer. Therefore, the Board concludes the amount Medicare would pay ... was properly reduced by primary payer payments.

Appalachian asserts that in this passage, the Secretary has taken the position perforce that all items and services provided during an inpatient stay constitute a single item or service for purposes of the MSP provisions. This construction, Appalachian contends, is plainly contrary to the statute, or alternatively, is unreasonable, because the statute defines the term "inpatient hospital services" as something composed of the several individual items and services furnished to a hospital inpatient during a particular hospital stay. See 42 U.S.C. § 1395x(b) (1994). All the items and services provided during a hospital admission,...

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