Canonsburg Gen. Hosp. v. Burwell

• Decision Date: 01 December 2015
• Docket Number: No. 13–5370.,13–5370.
• Citation: 807 F.3d 295
• Parties: CANONSBURG GENERAL HOSPITAL, Appellant v. Sylvia Mathews BURWELL, Secretary, U.S. Department of Health and Human Services, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

807 F.3d 295

CANONSBURG GENERAL HOSPITAL, Appellant

v.Sylvia Mathews BURWELL, Secretary, U.S. Department of Health and Human Services, Appellee.

No. 13–5370.

United States Court of Appeals, District of Columbia Circuit.

Argued Sept. 21, 2015.

Decided Dec. 1, 2015.

Sven C. Collins argued the cause for the appellant. Stephen P. Nash was with him on brief.

Benjamin M. Shultz, Attorney, United States Department of Justice, argued the cause for the appellee. Benjamin C. Mizer, Principal Deputy Assistant Attorney General, Vincent H. Cohen, Jr., Acting United States Attorney and Michael S. Raab, Attorney, were with him on brief. R. Craig Lawrence, Assistant United States Attorney, entered an appearance.

Before: HENDERSON, Circuit Judge, and EDWARDS and SENTELLE, Senior Circuit Judges.

Opinion for the Court filed by Circuit Judge HENDERSON.

KAREN LeCRAFT HENDERSON, Circuit Judge:

To administer Medicare reimbursements to healthcare providers, the Congress authorized the Secretary (Secretary) of the Department of Health and Human Services (HHS) to promulgate regulations setting the maximum cost amount HHS may reimburse a healthcare provider for services provided a Medicare beneficiary. Pursuant to this authority, the Secretary issued regulations setting out reasonable cost limits (RCLs) for specified medical services and establishing certain exceptions to those limits. Canonsburg General Hospital (Canonsburg) was the beneficiary of one such exception for many years beginning in 1987. Then, in 1998, it alleged that the Secretary's revised calculation of the exception unlawfully created a "reimbursement gap", which unfairly deprived it of the reasonable costs of its services. In 2001, Canonsburg contested the recalculation in a lawsuit brought in federal district court in Pennsylvania. Canonsburg Gen. Hosp. v. Thompson (Canonsburg I ), No. 00–cv–0284, 2001 WL 36339671 (W.D.Pa. Feb. 28, 2001). The district court upheld the Secretary's action. See id. at *5. In this case, Canonsburg continues to claim that the Secretary has violated the Administrative Procedure Act (APA), 5 U.S.C. §§ 551 et seq. , because her method of calculation is inconsistent with governing regulations and was promulgated without notice and comment. In light of Canonsburg I , the district court granted the Secretary's motion for summary judgment, concluding that issue preclusion barred Canonsburg's suit. Canonsburg Gen. Hosp. v. Sebelius (Canonsburg II ), 989 F.Supp.2d 8, 30 (D.D.C.2013). For the reasons set forth below, we affirm.

I. BACKGROUND

A. REASONABLE COST LIMITS AND THE ATYPICAL SERVICES EXCEPTION IN MEDICARE REIMBURSEMENT

Through the Centers for Medicare and Medicaid Services (CMS), the Secretary provides for the reimbursement of the reasonable costs of healthcare services for Medicare beneficiaries. See 42 U.S.C. § 1395f(b)(1)(A). Two aspects of the reimbursement scheme are relevant here.

The first is the system for managing the costs of reimbursement. Healthcare providers submit requests for reimbursement for services provided to Medicare beneficiaries, subject to the RCLs the Secretary has calculated based on statutory and regulatory restrictions. See 42 U.S.C. §§ 1395c –1395g ; see also St. Francis Health Care Ctr. v. Shalala, 205 F.3d 937, 939–43 (6th Cir.2000) (explaining how the Secretary calculates RCLs). The Secretary may adjust RCLs according to certain exceptions and allow skilled nursing facilities (SNFs) to be reimbursed above the established RCLs. See 42 U.S.C. § 1395yy(c) ; 42 C.F.R. § 413.30(e).

One such exception is the "atypical services" exception, which generally allows a healthcare provider to be reimbursed above the RCLs if the service it provides is, inter alia , "atypical in nature and scope."¹ 42 C.F.R. § 413.30(e)(1). For years, both hospital-based and freestanding SNFs² received full reimbursement for atypical services under this exception. See Canonsburg II, 989 F.Supp.2d at 13. In 1994, however, that changed. In order to effect congressionally directed cost savings, the Secretary altered the calculation for the atypical services exception for hospital-based SNFs. The new calculation, set forth in section 2534.5 of the Medicare Provider Reimbursement Manual (section 2534.5), created a reimbursement "gap" for hospital-based SNFs. Ctrs. for Medicare & Medicaid Servs., Provider Reimbursement Manual Part I § 2534.5, available at http://wayback.archive-it. org/2744/20111201152312/http://www.cms.gov/Manuals/PBM/list.asp (last visited Nov. 16, 2015). Whereas freestanding SNFs continued to receive reimbursement for the full cost of their atypical services, hospital-based SNFs were reimbursed below full cost. St. Francis, 205 F.3d at 941–43 (explaining section 2534.5 gap created for hospital-based SNFs).

The second relevant aspect of the Medicare reimbursement scheme involves the claims process itself. Under that process, an SNF submits a claim for reimbursement to a private intermediary, which processes the claim and provides reimbursement under CMS's authority. See 42 U.S.C. § 1395kk–1(a). The provider can appeal an unfavorable reimbursement decision to the Provider Reimbursement Review Board (PRRB), id. § 1395oo(a), whose members are appointed by the Secretary, id. § 1395oo(h). All proceedings before the PRRB are between the provider and the intermediary—neither the Secretary nor CMS is a party to the proceedings and the Secretary can participate only by filing an amicus brief or by providing counsel for the intermediary. 42 C.F.R. § 405.1843(a) -(d). The Secretary, however, has the discretionary authority to reverse, affirm or modify the PRRB's decision. See 42 U.S.C. § 1395oo (f)(1). The provider can seek review of the PRRB's decision—or the Secretary's decision if she exercises her discretion—in the district court "for the judicial district in which the provider is located" or in the "District Court for the District of Columbia". Id.

B. WESTERN DISTRICT OF PENNSYLVANIA LITIGATION

Canonsburg is a hospital-based SNF that has participated in the Medicare reimbursement program since 1984. Beginning in fiscal year 1987, Canonsburg applied for, and obtained, the atypical services exception for costs exceeding its RCLs. In 1994, however, the Secretary's revised gap methodology interpretation of section 2534.5 began to limit Canonsburg's reimbursements.³

In 2001, Canonsburg appealed a final reimbursement decision of the Secretary in the Western District of Pennsylvania, challenging section 2534.5 as applied to its reimbursements for fiscal years 1987 through 1990 and 1993. See Canonsburg I, 2001 WL 36339671, at *1. Canonsburg alleged that section 2534.5 was arbitrary, capricious and inconsistent with statutory language because it (1) "violate[d] the applicable cost limit statu[t]e, 42 U.S.C. § 1395yy(c), and regulation, 42 C.F.R. § 413.30(f)"; (2) was procedurally invalid because "it is a substantive r[u]le, yet it was not passed pursuant to the notice and comment requirements" of the APA; and (3) unreasonably discriminated between freestanding and hospital-based SNFs "in the exception process." Canonsburg I, 2001 WL 36339671, at *3–4. The district court rejected all of Canonsburg's arguments, relying heavily on a Sixth Circuit decision upholding section 2534.5. See Canonsburg I, 2001 WL 36339671, at *4–5 (citing St. Francis Health Care Ctr. v. Shalala, 205 F.3d 937 (6th Cir.2000) ). The court first concluded that the statutory language (42 U.S.C. § 1395yy ), as well as the regulatory language (42 C.F.R. § 413.30 ), regarding reasonable costs was permissive, not mandatory, and that the Secretary's interpretation of the language was reasonable. See Canonsburg I, 2001 WL 36339671, at *4. The court also viewed section 2534.5 as an interpretative rule, not a substantive rule, and thus concluded that it did not require notice and comment. See id. Finally, the court found no merit in Canonsburg's discrimination argument, holding that the Congress treated freestanding and hospital-based SNFs the same once it removed the excess costs from the hospital-based RCLs. See id. Canonsburg did not appeal the district court's grant of summary judgment in favor of the Secretary.

C. ADMINISTRATIVE PROCEEDINGS

In the late 1990s—and separate from the Canonsburg I litigation—Canonsburg began an administrative challenge to its reimbursement for fiscal year 1996. Canonsburg included in its reimbursement request a disallowance of $470,528, corresponding to the gap created by section 2534.5, but nevertheless claimed that it should be entitled to those funds. The Medicare intermediary granted Canonsburg the atypical services exception in a May 4, 1998 decision but disallowed the $470,528 in costs corresponding to the section 2534.5 gap. The intermediary also disallowed an additional $46,765 of offset costs that, according to its calculations, should have been included in the section 2534.5 gap but were not listed in the disallowance filed with Canonsburg's reimbursement request. Canonsburg appealed the $526,293⁴ of disallowed costs to the PRRB, which reversed the intermediary's decision.⁵ Canonsburg made the same arguments before the PRRB that it had made in Canonsburg I in 2001 and also relied on more recent decisions invalidating section 2534.5 as arbitrary and capricious. See St. Luke's Methodist Hosp. v. Thompson, 315 F.3d 984, 988–89 (8th Cir.2003) (striking down section 2534.5 because HHS misconstrued reimbursement for typical and atypical services costs); Montefiore Med. Ctr. v. Leavitt, 578 F.Supp.2d 129, 133–34 (D.D.C.2008) (finding section 2534.5 violated APA because HHS failed to provide notice and comment in promulgating section 2534.5); Mercy Med. Skilled Nursing Facility v. Thompson, No. C.A.99–2765TPJ, 2004 WL 3541332, at *2–3 (D.D.C. May 14, 2004) (same). Canonsburg did not mention Canonsburg I in its PRRB filings. The PRRB found section 2534.5 to be "illogical [ ]," concluding that the Secretary confused typical and atypical services costs in...