Borgess Med. Ctr. v. Sebelius, Civil Case No. 12–144 (RJL).

• Decision Date: 04 September 2013
• Docket Number: Civil Case No. 12–144 (RJL).
• Parties: BORGESS MEDICAL CENTER, et al., Plaintiff, v. Kathleen SEBELIUS, Secretary Department of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Columbia

966 F.Supp.2d 1

BORGESS MEDICAL CENTER, et al., Plaintiff,

v.Kathleen SEBELIUS, Secretary Department of Health and Human Services, Defendant.

Civil Case No. 12–144 (RJL).

United States District Court,

District of Columbia.

Sept. 4, 2013.

Lori Allison Rubin, Foley & Lardner, LLP, Washington, DC, for Plaintiff.

Peter C. Pfaffenroth, U.S. Attorney's Office, Washington, DC, for Defendant.

MEMORANDUM OPINION

RICHARD J. LEON, District Judge.

Plaintiffs Borgess Medical Center (“Borgess”) and Bronson Methodist Hospital (“Bronson”) (“plaintiffs” or “Hospitals,” collectively) commenced this action against Kathleen Sebelius, in her official capacity as Secretary of the United States Department of Health and Human Services (“Secretary”), pursuant to 42 U.S.C. § 1395 et seq., seeking judicial review of the Secretary's denial of reimbursements for costs associated with offsite resident training during fiscal years 2000 through 2004. See Compl. [Dkt. # 1]. Before the Court are the parties' cross-motions for summary judgment. Upon consideration of the parties' pleadings, relevant law, and the entire record in this case, the Court GRANTS defendant's Motion for Summary Judgment [Dkt. # 21] and DENIES plaintiffs' Motion for Summary Judgment [Dkt. # 19].

BACKGROUND

A. Statutory and Regulatory Background

The Medicare Act provides health insurance benefits to eligible elderly and disabled persons. 42 U.S.C. § 1395 et seq. The Centers for Medicare and Medicaid Services (“CMS”) administers the program for the Secretary. 42 U.S.C. § 1395kk; 42 C.F.R. § 400.200 et seq. Medicare Part A serves as hospital insurance and covers the cost of hospital care, related post-hospital care, home health services, and hospice care. 42 U.S.C. § 1395c et seq. The Secretary contracts with fiscal intermediaries to determine and process payments to hospitals. 42 U.S.C. § 1395h. At the close of the fiscal year, a participating hospital submits a cost report to its intermediary. 42 C.F.R. §§ 413.20, 413.24. After auditing the report, the intermediary issues a Notice of Program Reimbursement (“NPR”). 42 C.F.R. § 405.1803. A hospital may challenge an NPR by requesting a hearing before the Provider Reimbursement Review Board (“PRRB”). 42 U.S.C. § 1395 oo(a). The PRRB's decision is subject to review by the CMS Administrator. 42 U.S.C. § 1395 oo(f)(1); 42 C.F.R. § 405.1875(a). The Administrator's decision constitutes a final agency decision subject to judicial review. 42 U.S.C. § 1395 oo(f)(1); 42 C.F.R. § 405.1877.

Under Part A of the Medicare program, hospitals that operate approved medical residency programs are entitled to reimbursement for certain costs related to graduate medical education. Medicare makes both a direct graduate medical education payment (“GME”) and an indirect graduate medical education payment (“IME”). GME costs include residents' salaries and fringe benefits, as well as compensation paid to teaching physicians and supervisors. 42 U.S.C. § 1395ww(h); 42 C.F.R. § 413.86(b)(3) (1998). IME costs include higher-than-average operating costs incurred as an indirect result of having a teaching program. 42 U.S.C. §§ 1395f(b), 1395ww(d); 42 C.F.R. § 412.105 (1998).

Congress amended the Medicare statute in 1986 and 1997 to include the time residents spend training in nonhospital settings in GME and IME payment calculations. See42 U.S.C. §§ 1395ww(d)(5)(B)(iv), 1395ww(h)(4)(E). These statutory provisions (“Nonhospital Site Statutes”) permit reimbursement so long as (1) the residents' time is related to patient care, and (2) the hospital incurs all, or substantially all, of the costs for the training program in the nonhospital setting. Id., The Nonhospital Site Statutes do not define the second requirement, which is referred to herein as the “All or Substantially All Requirement.”

For the cost reporting years at issue in this case, the Secretary's regulations defined the statutory All or Substantially All Requirement to include:

the residents' salaries and fringe benefits (including travel and lodging where applicable) and the portion of the cost of teaching physicians' salaries and fringe benefits attributable to direct graduate medical education.

42 C.F.R. § 413.86(b)(3) (1998), AR at 0645. The Secretary also imposed an additional regulatory requirement that, in order for a hospital to count resident training time at nonhospital sites, the hospital must have a written agreement with the nonhospital site

indicat[ing] that the hospital will incur the cost of the resident's salary and fringe benefits while the resident is training in the nonhospital site and the hospital is providing reasonable compensation to the nonhospital site for supervisory teaching activities. The agreement must indicate the compensation the hospital is providing to the nonhospital site for supervisory teaching activities.

42 C.F.R. § 413.86(f)(4)(ii) (1998), AR at 0648. This regulation is referred to herein as the “Written Agreement Requirement.”

B. Factual and Procedural Background

Plaintiffs are non-profit acute care hospitals located in Kalamazoo, Michigan. The Hospitals have agreements with the Michigan State University Kalamazoo Center for Medical Studies (“KCMS”) to rotate medical residents through KCMS' nonhospital clinic facility (“Affiliation Agreements”). See AR at 931–42. The Hospitals' joint resident training program dates back to 1973, when they entered into an agreement establishing the predecessor of KCMS, the Southwestern Michigan Area Health Education Center (“SWMAHEC”). AR at 796–800. The 1973 Agreement, which remains in effect, provides that the Hospitals “shall provide the CORPORATION with financing to carry out its purposes as negotiated on a yearly basis.” See AR at 799, 811–15. In 1989, the Hospitals expanded the joint training program to include rotations at KCMS clinics. The Affiliation Agreements state that the Hospitals “share[ ] joint and equal responsibility for providing [KCMS] with sufficient financing to carry out [the KCMS] programs as negotiated on a yearly basis.” AR at 931, 933, 935, 937, 939, 941.

The Hospitals claim that their former fiscal intermediary, United Government Services (“UGS”), allowed Medicare reimbursement for costs the Hospitals incurred for resident rotations at KCMS clinics. See Compl. ¶ 23. In 2008, however, the Hospitals' current fiscal intermediary, National Government Services (“NGS”), began to issue NPRs and revised NPRs disallowing reimbursement for these costs.¹Id. at ¶ 24. NGS claimed that the Hospitals could not satisfy the statutory All or Substantially All Requirement because they split the costs of the KCMS training program. Id. NGS also found that the Hospitals failed to meet the Written Agreement Requirement. See AR at 47.

The Hospitals successfully challenged NGS' disallowances before the PRRB. See Compl. at ¶ 31; AR at 38–52. The PRRB concluded that the Hospitals satisfied the All or Substantially All Requirement because the two Hospitals jointly paid all of the costs of the resident training program at KCMS. AR at 48–50. The PRRB also held that the Hospitals satisfied the Written Agreement Requirement. AR at 46–48. The PRRB's decision was reversed, however, by the CMS Administrator, acting under authority delegated by the Secretary. AR at 2–19. The Administrator interpreted the All or Substantially All Requirement to preclude multiple hospitals from sharing the costs of nonhospital training (“Single Hospital Interpretation”). AR at 17. The Administrator also concluded that the Hospitals failed to comply with the Written Agreement Requirement. AR at 18. Plaintiffs now challenge that final agency decision.

STANDARD OF REVIEW

The Medicare Act provides for judicial review of the Administrator's final decision under the Administrative Procedure Act (“APA”). 42 U.S.C. § 1395 oo(f)(1). Under the APA's strict standard of review, the Court must set aside agency actions, findings, and conclusions that are “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). Under the arbitrary and capricious standard, an agency action “may be invalidated ... if [it is] not rational and based on consideration of the relevant factors.” FCC v. Nat'l Citizens Comm. for Broad., 436 U.S. 775, 803, 98 S.Ct. 2096, 56 L.Ed.2d 697 (1978) (citing Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 413–16, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971)). Factual conclusions are reviewed under the substantial evidence standard and may be overturned where they are “unsupported by substantial evidence in a case ... reviewed on the record of an agency hearing provided by statute.” 5 U.S.C. § 706(2)(E); see also Overton Park, 401 U.S. at 414, 91 S.Ct. 814. The Supreme Court has “defined ‘substantial evidence’ as ‘such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.’ ” Consolo v. Fed. Mar. Comm'n, 383 U.S. 607, 619–20, 86 S.Ct. 1018, 16 L.Ed.2d 131 (1966) (quoting Consol. Edison Co. of New York v. NLRB, 305 U.S. 197, 229, 59 S.Ct. 206, 83 L.Ed. 126 (1938)). Substantial evidence “is something less than the weight of the evidence, and the possibility of drawing two inconsistent conclusions from the evidence does not prevent an administrative agency's finding from being supported by substantial evidence.” Id. at 620, 86 S.Ct. 1018. In applying the substantial evidence standard, the reviewing court may not “displace ... [a] choice between two fairly conflicting views, even though the court would justifiably have made a different choice had the matter been before it de novo.” Universal Camera Corp. v. NLRB, 340 U.S. 474, 488, 71 S.Ct. 456, 95 L.Ed. 456 (1951).

The Supreme Court has established a two-step framework for reviewing an agency's interpretation of a statute that the agency administers. See Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837, 842–43, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Under the first step, the Court must look at the statute...