Board of Trustees of Knox County Hosp. v. Shalala, TH 95-0162 C M/H.

• Decision Date: 31 March 1997
• Docket Number: No. TH 95-0162 C M/H.,TH 95-0162 C M/H.
• Parties: BOARD OF TRUSTEES OF KNOX COUNTY HOSPITAL d/b/a Good Samaritan Hospital, Plaintiff, v. Donna E. SHALALA, as Secretary of the Department of Health and Human Services, Defendant.
• Court: U.S. District Court — Southern District of Indiana

959 F.Supp. 1026

BOARD OF TRUSTEES OF KNOX COUNTY HOSPITAL d/b/a Good Samaritan Hospital, Plaintiff, v. Donna E. SHALALA, as Secretary of the Department of Health and Human Services, Defendant.

No. TH 95-0162 C M/H.

United States District Court, S.D. Indiana.

March 31, 1997.

William H. Thompson, William S. Hall, Hall, Render, Killian, Heath & Lyman, Indianapolis, IN, for Plaintiff.

Gerald A. Coraz, Asst. U.S. Atty., Office of U.S. Attorney, Indianapolis, IN, Donna Morros Weinstein, Lauren S. Ruby, U.S. Dept. of Health and Human Services, Chicago, IL, for Defendant.

ORDER ON CROSS MOTIONS FOR SUMMARY JUDGMENT

McKINNEY, District Judge.

The term Rural Referral Center ("RRC") denotes a rural hospital with operating characteristics and costs similar to those of an urban hospital. Under the Medicare program RRCs receive reimbursement similar to urban hospitals. To qualify for RRC status, a hospital must meet four specific criteria established by regulation. The parties agree that Plaintiff Board of Trustees of Knox County Hospital, d/b/a/ Good Samaritan Hospital ("Good Samaritan" or "Hospital"), satisfied three of these criteria for its 1985 cost year. At issue here is whether the Hospital's case-mix index ("CMI") met the 1.03 threshold required by the applicable regulation for that year. The matter now pends on cross motions for summary judgment. Upon review of the present record, this Court concludes that Defendant Donna Shalala, Secretary of the Department of Health and Human Services ("Secretary"), did not act in a manner which was arbitrary and capricious, an abuse of discretion, or contrary to law when she determined that Good Samaritan's CMI did not satisfy the regulatory requirement. Accordingly, her action shall be upheld, her motion for summary judgment GRANTED, and the Hospital's motion for summary judgment DENIED.

I. BACKGROUND

Good Samaritan is a 342-bed hospital located in Vincennes, Indiana. The Hospital offers many services comparable to urban hospitals, including end-stage renal dialysis services, inpatient and outpatient surgical services, and other resource-intensive, tertiary services. Because Good Samaritan offers such sophisticated services, it must compete with its urban counterparts for employees, medical specialists, and other support staff. As an additional result, the Hospital incurs costs similar to those of urban hospitals. Good Samaritan has been certified under the Medicare Program since 1966 and has qualified for RRC status for all years subsequent to 1985.

Initially, the Health Care Financing Administration of the United States Department of Health and Human Services ("HCFA" or "Agency") reimbursed Medicare providers based upon their reasonable costs. The providers sent the HCFA bills which detailed the services they furnished to Medicare inpatients. For twenty percent of the Medicare beneficiaries, hospitals also had to submit a narrative description of the beneficiary's diagnosis at discharge and the surgical procedures performed upon him or her. The HCFA coded these narratives and maintained both the billing information and the clinical information in a statistical file called MEDPAR.

In the early eighties, Congress determined that its method of reimbursing medical expenses at cost was inefficient. As a result, Congress enacted the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") to curb hospital spending by adjusting certain Medicare payment limits. At the same time, Congress directed the Secretary to develop a proposal for prospective Medicare reimbursement. The Secretary did so, and, on April 21, 1983, Congress voted to substitute the Prospective Payment System ("PPS") for cost-based reimbursement.

Under TEFRA, Congress instructed the Secretary to "establish case mix indexes for all short-term hospitals...." 42 U.S.C. § 1395ww(a)(1)(B)(i). The case mix index ("CMI") is a mathematical representation of the complexity—meaning cost—of the average case treated at a particular hospital. More particularly, the CMI represents the cost of a mix of cases at a specific hospital compared to the cost of the mix of cases at the average American hospital. To determine a CMI for each hospital provider, the Secretary relied upon the MEDPAR file devoted to that provider. Beginning in September of 1982, the Secretary calculated the 1981 CMI for each provider. In September of 1983, the Secretary published these CMIs in the Federal Register. In implementing the PPS, the Agency utilized these CMIs to compute Medicare reimbursement.

The CMI not only affects the amount of Medicare reimbursement a provider hospital may receive but also factors into the determination of whether the hospital may qualify as a RRC. Soon after the adoption of the PPS, Congress directed the Secretary to provide for sufficient "exceptions and adjustments" to providers' Medicare reimbursement "to account for the special needs of regional and national referral centers." 42 U.S.C § 1395ww(d)(5)(C)(i). Of particular relevance to the instant case, Congress stated:

A hospital which is classified as a rural hospital may appeal to the Secretary to be classified as a rural referral center under this clause on the basis of criteria (established by the Secretary) which shall allow the hospital to demonstrate that it should be so reclassified by reason of certain of its operating characteristics being similar to those of a typical urban hospital located in the same census region....

Id. Pursuant to this congressional directive, the Secretary prepared a regulation which stated the requirements a provider must satisfy to qualify for RRC status. This regulation was published in final form at 49 Federal Register 34,728 (August 31, 1984). To qualify, a provider must meet four separate requirements, only one of which has been contested in the present case. 42 C.F.R. § 405.476(g). Under Section 405.476(g)(1)(iii)(A), a hospital must have had a CMI of at least 1.03 for the year of 1981.¹

The Code of Federal Regulations does not explicitly state what method or database the Secretary must use to determine a provider's 1981 CMI. However, the Secretary elected to rely upon the information contained in the MEDPAR database. When the Secretary published the final version of the regulation, it was noted that "we are revising § 405.476(g)(1)(iii)(A) to permit hospitals to meet the case-mix criterion by having a published case-mix index value that is equal to or greater than [] 1.03 in 1981 based on the index values published in the September 1, 1983 interim final rule...." 49 Fed.Reg. at 34,741. In addition, the Secretary specifically rejected comments suggesting that "hospitals should be allowed to substitute other criteria for the one we published in the NPRM." Id., at 34,743. According to the Secretary, the Agency "selected the 1981 case-mix index for this criterion because it represents the most current published data available." Id. Moreover, the Secretary indicated that the HCFA would not accept CMIs calculated by the providers or other entities, such as the Commission on Professional and Hospital Activities ("CPHA"):

The basic tenet of the prospective payment system is that the rates paid to hospitals are determined prospectively and are based on the best data available at the time. Thus, a hospital knows in advance what its payment amounts will be. In addition, revisions to case-mix index values, whether upward or downward, would upset the budget neutrality adjustment. Therefore, we have denied any hospital the right to request review of its 1981 case-mix index value based on 100 percent of its cases. This policy holds whether the request for review is for purposes of meeting the referral center criteria or for determining the hospital-specific portion of a hospital's payment rate.

We cannot allow substitution of the CPHA data in lieu of our published 1981 case-mix index because these data are developed and published by a source totally independent of HCFA. We have no way to verify either the raw data submitted by the hospital to CPHA or CPHA's processing of the data except by performing a 100 percent review ourselves. We do not believe a review by HCFA is appropriate.

Id. at 34,743-44.

On December 17, 1984, Good Samaritan submitted a written request to the HCFA asking to be designated as an RRC for the 1985 cost period. In this request, the Hospital acknowledged that the Agency had calculated and published its 1981 CMI as 1.0232. However, Good Samaritan also included a CMI study conducted by CPHA. Upon examination of one hundred percent of Good Samaritan's 1981 Medicare discharges—as opposed to the twenty percent included in the MEDPAR database-CPHA concluded that Good Samaritan's 1981 was 1.0637, which exceeded the minimum threshold and, when combined with the other undisputed criteria, qualified Good Samaritan for RRC status.

The Agency rejected Good Samaritan's request. Ultimately, the HCFA concluded that, although the Hospital did meet three of the four necessary criteria, the Hospital's published CMI did not satisfy the minimum requirement. In particular, the HCFA stated that it could not accept recalculated CMIs, relying upon the policy stated in the Federal Register.

Good Samaritan appealed this ruling to the Provider Reimbursement Review Board ("PRRB" or "Board"). After a hearing in January, 1993, the PRRB determined that a Medicare provider has a statutory right to challenge the HCFA's determination of its CVI and to demonstrate that it should be designated an RRC. See 42 U.S.C. § 1395ww(d)(5)(C)(i). The Board also noted that the preamble language relied upon by the Agency lacks the force and effect of law. Accordingly, the Board ordered the HCFA to recalculate Good Samaritan's CMI using the data relied upon by CPHA.

The Agency then sought review by the HCFA administrator. On May 26, 1995, the administrator reversed the Board's decision, noting that the HCFA's policy did not allow the Hospital to...