Bellevue Hosp. Center v. Leavitt

• Decision Date: 03 April 2006
• Docket Number: Docket No. 05-1539-CV.
• Citation: 443 F.3d 163
• Parties: BELLEVUE HOSPITAL CENTER, Beth Israel Medical Center, Bridgeport Hospital, Bronx-Lebanon Hospital Center, Brookdale University Hospital and Medical Center, The Brooklyn Hospital Center, Cabrini Medical Center, Community Hospital at Dobbs Ferry, Coney Island Hospital, Elmhurst Hospital Center, Englewood Hospital & Medical Center, Flushing Hospital Medical Center, Greenwich Hospital, Harlem Hospital Center, Hospital for Joint Diseases Orthopedic Institute, Hospital for Special Surgery, Hudson Valley Hospital Center, Interfaith Medical Center, Jacobi Medical Center, Jamaica Hospital Medical Center, Kings County Hospital Center, Kingsbrook Jewish Medical Center, Lawrence Hospital Center, Lincoln Medical & Mental Health Center, The Long Island College Hospital, Long Island Jewish Medical Center, Lutheran Medical Center, Maimonides Medical Center, Manhattan Eye, Ear and Throat Hospital, Montefiore Medical Center, The Mount Sinai Hospital, The Mount Vernon Hospital, Nassau University Medical Center, New York Eye and Ear Infirmary, New York Methodist Hospital, New York Presbyterian Hospital, North Central Bronx Hospital, North General Hospital, North Shore University Hospital at Glen Cove, Northern Dutchess Hospital, Northern Westchester Hospital, North Shore University Hospital at Forest Hills, New York Community Hospital of Brooklyn, New York Hospital Queens, New York Westchester Square Medical Center, Nyack Hospital, NYU Downtown Hospital, NYU Hospitals Center, Our Lady of Mercy Medical Center, Peninsula Hospital Center, Phelps Memorial Hospital Center, Putnam Hospital Center, Queens Hospital Center, Robert Wood Johnson University Hospital, Sound Shore Medical Center, St. Barnabas Hospital, St. Francis Hospital Poughkeepsie, St. Francis Hospital Roslyn, St. John's Riverside Hospital, St. Josephs Hospital Yonkers, St. Lukes-Roosevelt Hospital Center, St. Vincents-CMC, St. Vincents-Manhattan, St. Vincents Midtown Hospital, St. Vincents-Staten Island, Stamford Health System, Staten Island University Hospital, Suny Downstate Medical Center, Victory Memorial Hospital, Westchester Medical Center, White Plains Hospital Center, Woodhull Medical & Mental Health Center, Wyckoff Heights Medical Center, Plaintiffs-Appellants, v. Michael O. LEAVITT,<SMALL><SUP>1</SUP></SMALL> Secretary of the United States Department of Health and Human Services, Defendant-Appellee, New Jersey Hospital Association, Movant.
• Court: U.S. Court of Appeals — Second Circuit

443 F.3d 163

BELLEVUE HOSPITAL CENTER, Beth Israel Medical Center, Bridgeport Hospital, Bronx-Lebanon Hospital Center, Brookdale University Hospital and Medical Center, The Brooklyn Hospital Center, Cabrini Medical Center, Community Hospital at Dobbs Ferry, Coney Island Hospital, Elmhurst Hospital Center, Englewood Hospital & Medical Center, Flushing Hospital Medical Center, Greenwich Hospital, Harlem Hospital Center, Hospital for Joint Diseases Orthopedic Institute, Hospital for Special Surgery, Hudson Valley Hospital Center, Interfaith Medical Center, Jacobi Medical Center, Jamaica Hospital Medical Center, Kings County Hospital Center, Kingsbrook Jewish Medical Center, Lawrence Hospital Center, Lincoln Medical & Mental Health Center, The Long Island College Hospital, Long Island Jewish Medical Center, Lutheran Medical Center, Maimonides Medical Center, Manhattan Eye, Ear and Throat Hospital, Montefiore Medical Center, The Mount Sinai Hospital, The Mount Vernon Hospital, Nassau University Medical Center, New York Eye and Ear Infirmary, New York Methodist Hospital, New York Presbyterian Hospital, North Central Bronx Hospital, North General Hospital, North Shore University Hospital at Glen Cove, Northern Dutchess Hospital, Northern Westchester Hospital, North Shore University Hospital at Forest Hills, New York Community Hospital of Brooklyn, New York Hospital Queens, New York Westchester Square Medical Center, Nyack Hospital, NYU Downtown Hospital, NYU Hospitals Center, Our Lady of Mercy Medical Center, Peninsula Hospital Center, Phelps Memorial Hospital Center, Putnam Hospital Center, Queens Hospital Center, Robert Wood Johnson University Hospital, Sound Shore Medical Center, St. Barnabas Hospital, St. Francis Hospital Poughkeepsie, St. Francis Hospital Roslyn, St. John's Riverside Hospital, St. Josephs Hospital Yonkers, St. Lukes-Roosevelt Hospital Center, St. Vincents-CMC, St. Vincents-Manhattan, St. Vincents Midtown Hospital, St. Vincents-Staten Island, Stamford Health System, Staten Island University Hospital, Suny Downstate Medical Center, Victory Memorial Hospital, Westchester Medical Center, White Plains Hospital Center, Woodhull Medical & Mental Health Center, Wyckoff Heights Medical Center, Plaintiffs-Appellants v. Michael O. LEAVITT,¹ Secretary of the United States Department of Health and Human Services, Defendant-Appellee,

New Jersey Hospital Association, Movant.

Docket No. 05-1539-CV.

United States Court of Appeals, Second Circuit.

Argued: December 15, 2005.

Decided: April 3, 2006.

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Peter F. Nadel, Katten Muchin Rosenman LLP (Joseph V. Willey and Steven J. Katz, of counsel), New York, N.Y., Appearing for Plaintiffs-Appellants.

Robert W. Sadowski, Assistant United States Attorney (Sara L. Shudofsky, Assistant United States Attorney, of counsel) for Michael J. Garcia, United States Attorney for the Southern District of New York, New York, N.Y., Appearing for Defendant-Appellee.

Andrew F. McBride, III, Kalison, McBride, Jackson & Murphy, P.A. (Loretta Orlando, of counsel), Warren, N.J., Appearing for Movant.

Before: POOLER, KATZMANN, B.D. PARKER, Circuit Judges.

KATZMANN, Circuit Judge.

Seventy-six hospitals, plaintiffs-appellants here, challenge the Department of Health and Humans Services' ("HHS") implementation of a statutory requirement that the agency adjust hospitals' reimbursements for the costs of administering care to Medicare recipients to reflect "differences in hospital wage levels" across "geographic area[s]." 42 U.S.C. § 1395ww(d)(3)(E)(i).

For more than two decades, HHS has divided the nation into geographic areas for these purposes by adopting the Metropolitan Statistical Areas ("MSAs") formulated by the Office of Management and Budget ("OMB"). Most recently, in 2004, it adopted the version of the MSAs released by OMB in 2003. Compared with previous iterations, the New York City MSA was slightly expanded and now includes certain additional hospitals in northern New Jersey. Because the New Jersey hospitals' wages are somewhat lower, the average wage level in the MSA dropped, along with the wage adjustment for hospitals in that MSA. Plaintiffs allege they will receive $812 million less in reimbursements over the next ten years than they would have under their former wage adjustment.

Plaintiffs argue both that the use of MSAs as proxies for "geographic areas" is an unreasonable interpretation of the Medicare Act and that the agency took improper considerations into account in adopting the MSAs. Applying the analysis required by Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), we hold that the term "geographic area" is ambiguous and that the MSAs are a reasonable gap-filler. In addition, we find that the defendant-appellee did not act arbitrarily and capriciously in its 2004 adoption of the latest MSAs. With respect to this issue, the trial court is affirmed in full.

Plaintiffs also challenge defendant's decision in the same 2004 rulemaking to apply at only ten-percent effectiveness in its first year a new reimbursement adjustment that controls for hospitals' decisions to hire more or fewer skilled professionals, on the ground that the data the agency had collected were not of sufficient quality to merit full implementation. We agree with the district court that the agency lacked the statutory authority to do so and also find that the agency acted arbitrarily and capriciously. However, we modify the district court's remedy, which was to order the agency to immediately apply the adjustment in full. Instead, we order the agency to apply the adjustment in full by September 30, 2006, and to have completed all data collection and measurement and any other steps necessary to do so by then. With respect to this issue, the judgment of the trial court is affirmed in part and modified in part.

I.

A.

The Medicare program, established by Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., pays for covered medical services provided to eligible aged and disabled persons. Of relevance to this case, it reimburses hospitals for the cost of serving Medicare beneficiaries. See 42 U.S.C. § 1395f. The Centers for Medicare and Medicaid Services ("CMS") is the agency within the Department of Health and Human Services ("HHS") responsible for administering the Medicare program.²

From the inception of Medicare in 1965 until 1983, hospitals were reimbursed for their actual costs in treating beneficiaries, so long as those costs were reasonable. In 1983, Congress overhauled the reimbursement system, switching to what is known as the Inpatient Prospective Payment System ("IPPS"). See Social Security Amendments of 1983, Pub.L. No. 98-21, 97 Stat. 65 (1983). Under the IPPS, hospitals are not reimbursed for their actual costs, but are instead paid fixed rates for providing specific categories of treatment, known as "diagnosis related groups," or "DRGs." See 42 U.S.C. § 1395ww(d). Separate DRG rates are set for hospitals in urban and rural areas. Id. § 1395ww(d)(2)(G) & (3). The purpose of this switch was to "encourage health care providers to improve efficiency and reduce operating costs." Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C.Cir.1994); see also H.R. Conf. Rep. No. 98-25, at 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351.

Of particular significance for this case, the Secretary must adjust DRG payment rates for the relative labor costs in each hospital's geographic area. Accordingly, the base DRG payment rate is divided into two portions: the labor-related costs, which get adjusted for these geographic differences, and the non-labor-related costs, which do not. While the relative proportions of these two cost sources formerly were "estimated by the Secretary from time to time," see 42 U.S.C. § 1395ww(d)(3)(E)(i), for discharges occurring on or after October 1, 2004, Congress has removed the Secretary's discretion and set the labor-cost proportion at sixty-two percent of the base DRG payment. Id. § 1395ww(d)(3)(E)(ii). In relevant part, the Secretary is required to

adjust the [labor-related costs] of the DRG prospective payment rates . . . for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level. . . . [A]t least every 12 months[,] the Secretary shall update the factor under the preceding sentence on the basis of a survey conducted by the Secretary (and updated as appropriate) of the wages and wage-related costs of [covered] hospitals in the United States . . . . Any adjustments or updates made under this subparagraph for a fiscal year . . . shall be made in a manner that assures that the aggregate payments under this subsection in the fiscal year are not greater or less than those that would have been made in the year without such adjustment. . . .

42 U.S.C. § 1395ww(d)(3)(E)(i).

In other words, the Secretary must, at least once annually, compute a wage factor for each hospital "reflecting" the relative wage level in that hospital's "geographic area," and then apply that factor to the sixty-two percent of the DRG base rate that is attributable to labor costs. These adjustments must be cost neutral, so that any increase in one hospital's wage factor must be offset by a decrease in another's.

From its initial implementation of this law in 1985 through the present, CMS has consistently grouped hospitals into geographic areas by adopting the Metropolitan Statistical Areas ("MSAs") developed by the Office of Management and Budget ("OMB") for use throughout the federal government. It also uses MSAs for other aspects of the reimbursement formula, such as to divide hospitals into urban and rural regions (i.e., hospitals that are part of MSAs and those that are not). See 42...