Athens Community Hosp. v. Heckler

• Decision Date: 31 May 1983
• Docket Number: Civ. No. 3-82-708.
• Citation: 565 F. Supp. 695
• Parties: ATHENS COMMUNITY HOSPITAL, Bedford County General Hospital, Bristol Memorial Hospital, Chamberlain Memorial Hospital, Johnson County Memorial Hospital, Kingsport Hospital, U.T. Memorial Hospital, and Woods Memorial Hospital v. Margaret M. HECKLER, Secretary of the Department of Health and Human Services and Carolyne K. Davis, Administrator, Health Care Financing Administration.
• Court: U.S. District Court — Eastern District of Tennessee

565 F. Supp. 695

ATHENS COMMUNITY HOSPITAL, Bedford County General Hospital, Bristol Memorial Hospital, Chamberlain Memorial Hospital, Johnson County Memorial Hospital, Kingsport Hospital, U.T. Memorial Hospital, and Woods Memorial Hospital v. Margaret M. HECKLER, Secretary of the Department of Health and Human Services and Carolyne K. Davis, Administrator, Health Care Financing Administration.

Civ. No. 3-82-708.

United States District Court, E.D. Tennessee, N.D.

May 31, 1983.

Dale C. Allen, Knoxville, Tenn., Robert A. Klein, Richard A. Jones, Los Angeles, Cal., for plaintiffs.

John H. Gill, Jr., U.S. Atty., and J. Michael Haynes, Asst. U.S. Atty., Knoxville, Tenn., Juan A. Del Real, Gen. Counsel, Ann T. Hunsaker, Asst. Gen. Counsel, Jeanne Schulte Scott, Dennis S. Diaz, Attys., Dept. of H & HS, Washington, D.C., for defendants.

MEMORANDUM

ROBERT L. TAYLOR, Chief Judge.

In this action plaintiff hospitals challenge the validity of a Medicare regulation apportioning the costs of hospital medical malpractice insurance for Medicare reimbursement purposes. The regulation, 42 C.F.R. § 405.452(b)(1)(ii), was promulgated by the Secretary¹ of the Department of Health, Education, and Welfare in 1979. After the rule was adopted, defendant Secretary² of the Department of Health and Human Services (the Secretary) acquired responsibility for the implementation of the regulation and administration of the Medicare program. The case is before the Court on plaintiffs' and defendants' cross-motions for summary judgment.

Plaintiffs, all hospitals located in Tennessee, are qualified providers of medical services under the provisions of the Social Security Act. 42 U.S.C. § 1395, et seq. As such, they are entitled to reimbursement for the reasonable cost of services provided to Medicare beneficiaries. 42 U.S.C. § 1395f(b). Reasonable cost is defined as the "cost actually incurred, excluding therefrom any part of the incurred costs found to be unnecessary in the efficient delivery of needed health services ...." 42 U.S.C. § 1395x(v)(1)(A). Congress delegated authority to the Secretary to promulgate regulations implementing the reasonable cost provisions of the Medicare Act. Id. The Act further directs that,

In prescribing the regulations referred to in the preceding sentence, the Secretary shall consider, among other things, the principles generally applied by national organizations or established prepayment organizations (which have developed such principles) in computing the amount of payment, to be made by persons other than the recipients of services, to providers of services on account of services furnished to such recipients by such providers. Such regulations may provide for determination of the costs of services on a per diem, per unit, per capita, or other basis, may provide for using different methods in different circumstances, may provide for the use of estimates of costs of particular items or services, may provide for the establishment of limits on the direct or indirect overall incurred costs or incurred costs of specific items or services or groups of items or services to be recognized as reasonable based on estimates of the costs necessary in the efficient delivery of needed health services to individuals covered by the insurance programs established under this subchapter, and may provide for the use of charges or a percentage of charges where this method reasonably reflects the costs. Such regulations shall (i) take into account both direct and indirect costs of providers of services (excluding therefrom any such costs, including standby costs, which are determined in accordance with regulations to be unnecessary in the efficient delivery of services covered by the insurance programs established under this subchapter) in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this subchapter will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs, and (ii) provide for the making of suitable retroactive corrective adjustments where, for a provider of services for any fiscal period, the aggregate reimbursement produced by the methods of determining costs proves to be either inadequate or excessive.

Id.

Prior to July 1, 1979, the Secretary reimbursed malpractice premium costs in proportion to the percentage of hospital use by Medicare beneficiaries. On March 15, 1979 the Secretary published a notice of proposed rulemaking in anticipation of changing the established reimbursement policy. 44 Fed. Reg. 15744-5. The proposed rule apportioned malpractice premium costs to Medicare based on the paid malpractice claims history of individual providers. On May 1, 1979 the Secretary granted a fifteen day extension to the 45-day period for public comment. The Secretary promulgated the final rule on June 1, 1979. It provides in pertinent part, as follows:

Malpractice insurance. For cost reporting periods beginning on or after July 1, 1979, costs of malpractice insurance premiums and self-insurance fund contributions must be separately accumulated and directly apportioned to Medicare. The apportionment must be based on the dollar ratio of the provider's Medicare paid malpractice losses to its total paid malpractice losses for the current cost reporting period and the preceding 4-year period. If a provider has no malpractice loss experience for the 5-year period, the costs of malpractice insurance premiums of self-insurance fund contributions must be apportioned to Medicare based on the national ratio of malpractice awards paid to Medicare beneficiaries to malpractice awards paid to all patients. The Health Care Financing Administration will calculate this ratio periodically based on the most recent departmental closed claim study. If a provider pays allowable uninsured malpractice losses incurred by Medicare beneficiaries, either through allowable deductible or coinsurance provisions, or as a result of an award in excess of reasonable coverage limits, or as a governmental provider, such losses and related direct costs must be directly assigned to Medicare for reimbursement.

The final rule contained one substantive change from the proposed rule. Under the proposed regulation, if a provider had no malpractice loss experience for the fiveyear cost reporting period, reimbursement would be based on an actuarial estimate of Medicare's share of the malpractice cost. 44 Fed.Reg. 15745. The "Supplementary Information" provided in the notice of proposed rulemaking included several alternative apportionment methods, however. These included a "national ratio" of Medicare patient malpractice awards to non-Medicare patient malpractice awards. Id. The regulation as adopted applies a "national ratio" in the absence of malpractice loss experience. 42 C.F.R. § 405.452(b)(1)(ii).

Plaintiffs say that the Malpractice Rule is invalid because it was issued in violation of the notice and comment procedures of the Administrative Procedure Act (APA). 5 U.S.C. § 553. Further, they claim that the substantive provisions of the rule violate the Medicare Act and are arbitrary, capricious, and an abuse of discretion within the meaning of the APA. 5 U.S.C. § 706(2)(A).

Procedural Issues

The Administrative Procedure Act requires that new regulations be preceded by a notice of proposed rulemaking. 5 U.S.C. § 553(b). The APA also mandates a thirty-day period for public comment. 5 U.S.C. § 553(d). In this case the Secretary allowed a sixty-day comment period. Plaintiffs' claim of inadequate opportunity for public comment is therefore without merit.

Plaintiffs also say that the notice of proposed rulemaking failed to apprise the public of the alternative "national ratio" formulation for malpractice cost reimbursement. As noted above, the "Supplementary Information" to the notice indicated the possibility of alternative formulations, including a "national ratio." See 44 Fed.Reg. 15745. As indicated by the District of Columbia Court of Appeals,

Section 553(b) does not require that interested parties be provided precise notice of each aspect of the regulations eventually adopted. Rather, notice is sufficient if it affords interested parties a reasonable opportunity to participate in the rulemaking process.

Forester v. Consumer Product Safety Commission, 559 F.2d 774, 787 (D.C.Cir.1977). The Court is of the opinion that the notice in this case provided adequate information for public comment on the "national ratio" provision. Furthermore, the failure to specifically identify and publish the primary report relied upon by the Secretary does not invalidate the notice. The notice referred to a "study conducted by an HEW consultant." This information was adequate as the record reflects that the report was made available to persons interested in pursuing the matter.

Plaintiffs also urge that the Secretary failed to "incorporate in the rules adopted a concise general statement of their basis and purpose." 5 U.S.C. § 553(c). The adequacy of the Secretary's identification of the issues and his response thereto in the "basis and purpose" statement is reviewable under the arbitrary and capricious standard of 5 U.S.C. § 706(1)(A). See Home Box Office, Inc. v. Federal Communications Commission, 567 F.2d 9, 35 (D.C.Cir. 1977), cert. denied, 434 U.S. 829, 98 S.Ct. 111, 54 L.Ed.2d 89 (1977). As the court reaffirmed in Home Box Office, the "concise and general" statement,

must be accommodated to the realities of judicial scrutiny, which do not contemplate that the court itself will, by a laborious examination of the record, formulate in the first instance the significant issues faced by the agency and articulate the rationale of their resolution. * * * The record must enable us to see what major issues of policy were ventilated by the informal

...