Cape Cod Hosp. v. Sebelius

• Decision Date: 14 January 2011
• Docket Number: No. 09–5447.,09–5447.
• Citation: 630 F.3d 203
• Parties: CAPE COD HOSPITAL, et al., Appellantsv.Kathleen SEBELIUS, Secretary, United States Department of Health and Human Services, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

630 F.3d 203

394 U.S.App.D.C. 59

CAPE COD HOSPITAL, et al., Appellants

v.Kathleen SEBELIUS, Secretary, United States Department of Health and Human Services, Appellee.

No. 09–5447.

United States Court of Appeals, District of Columbia Circuit.

Argued Nov. 8, 2010.Decided Jan. 14, 2011.

Appeal from the United States District Court for the District of Columbia (No. 1:08–cv–01751).Paul D. Clement argued the cause for appellants. With him on the briefs were Christopher L. Keough, Stephanie A. Webster, Erin E. Murphy, John M. Faust, and John P. Elwood.Jeffrey Clair, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief were Ronald Machen, U.S. Attorney, and Michael S. Raab, Attorney. R. Craig Lawrence, Assistant U.S. Attorney, entered an appearance.Before: TATEL, Circuit Judge, and WILLIAMS and RANDOLPH, Senior Circuit Judges.Opinion for the Court filed by Circuit Judge TATEL.TATEL, Circuit Judge:

Five hospitals contend that the Secretary of Health and Human Services improperly implemented a statutory provision in a way that over the years has progressively reduced Medicare payments for inpatient services. In particular, they challenge rules governing reimbursements for the 2007 and 2008 fiscal years. Because the Secretary failed to provide a reasoned response to the hospitals' comments regarding those rules, we vacate the district court's grant of summary judgment in the Secretary's favor and remand for further proceedings in light of the guidance set forth in this opinion.

I.

Established in 1965, Medicare “provides federally funded health insurance for the elderly and disabled.” Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1226–27 (D.C.Cir.1994). The Secretary administers the program through the Centers for Medicare and Medicaid Services (CMS). Originally, Medicare reimbursed hospitals based on the “ ‘reasonable costs' ” they incurred in providing services to Medicare patients. Id. at 1227 (quoting 42 U.S.C. § 1395f(b) (1988)). Concerned that this system created inadequate incentives for hospitals to control costs, Congress in 1983 required the Secretary to implement a prospective payment system under which hospitals would receive a fixed payment for inpatient services. Id. Since hospitals receive the same payment under this system regardless of their actual costs, Congress believed that it would encourage efficiency “by rewarding cost[-]effective hospital practices.” Id. (quoting H. Rep. No. 98–25, at 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351).

In calculating prospective payment rates, CMS begins with a figure called the “standardized amount,” which roughly reflects the average cost incurred by hospitals nationwide for each patient they treat and then discharge. See 42 U.S.C. § 1395ww(d)(2); Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates, 71 Fed.Reg. 47,870, 48,146 (Aug. 18, 2006) [hereinafter Final 2007 Rule]. Central to the issue before us, CMS does not calculate the standardized amount from scratch each year. Instead, following Congress's directive, it calculated the standardized amount for a base year and has since carried that figure forward, updating it annually for inflation. See 42 U.S.C. § 1395ww(b)(3)(B)(i), (d)(2), (d)(3)(A)(iv)(II); 42 C.F.R. § 412.64(c)–(d); Final 2007 Rule, 71 Fed.Reg. at 48,146; see also Prospective Payments for Medicare Inpatient Hospital Services, 48 Fed.Reg. 39,752, 39,763–64 (Sept. 1, 1983) (explaining how the Health Care Financing Administration, CMS's predecessor, developed base-year cost data at the inception of the inpatient prospective payment system).

To account for the fact that labor costs vary across the country, CMS determines the proportion of the standardized amount attributable to wages and wage-related costs and then multiplies that labor-related proportion by a “wage index” that reflects “the relation between the local average of hospital wages and the national average of hospital wages.” Appellee's Br. 5; see also 42 U.S.C. § 1395ww(d)(2)(H), (d)(3)(E); Se. Ala. Med. Ctr. v. Sebelius, 572 F.3d 912, 914–15 (D.C.Cir.2009). Unlike the standardized amount, wage indexes are calculated anew each year instead of being carried forward from one year to the next.

The standardized amount is also modified to account for the fact that the costs of treating patients vary based on the patients' diagnoses. Medicare patients are classified into different groups based on their diagnoses, and each of these “diagnosis-related groups” is assigned a particular “weight” representing the relationship between the cost of treating patients within that group and the average cost of treating all Medicare patients. See 42 U.S.C. § 1395ww(d)(4).

Putting all these components together, CMS determines how much a hospital should be paid for treating a Medicare patient by performing the following calculation (where SA = standardized amount; labor% = the proportion of the standardized amount attributable to wages and wage-related costs; non-labor% = the proportion of the standardized amount not attributable to labor-related costs; WI = wage index; and DRG Weight = the weight assigned to a particular diagnosis-related group):

[SA*(non-labor%) + (SA*(labor%)*WI) ]*(DRG Weight) = Payment

In 1997, Congress determined that “[a]n anomaly that exists with the way area wage indexes are applied has resulted in some urban hospitals being paid less than the average rural hospital in their states.” H.R.Rep. No. 105–149, at 1305 (1997). To correct this problem, Congress provided in the Balanced Budget Act of 1997 (“BBA”) that the wage index assigned to a hospital in an urban area must be at least as great as the wage index assigned to rural hospitals within the same state. Pub.L. No. 105–33, § 4410(a), 111 Stat. 251, 402 (reprinted at 42 U.S.C. § 1395ww note) (“[T]he area wage index applicable under [42 U.S.C. § 1395ww(d)(3)(E) ] to any hospital which is not located in a rural area ... may not be less than the area wage index applicable under such section to hospitals located in rural areas in the State in which the hospital is located.”). This provision is commonly referred to as the “rural floor.”

Potentially, the rural floor could affect the total amount of money Medicare pays hospitals each year. For example, if CMS increased the wage indexes of urban hospitals to bring them in line with the wage indexes of rural hospitals in the same state, payments to those urban hospitals would increase. All other things being equal, the aggregate amount of Medicare payments would increase as well. But Congress required the Secretary to take steps to ensure that all other things would not be equal. It mandated that the rural floor be “budget neutral.” In other words, it required the Secretary to implement the rural floor in a manner that would have no effect on the annual total of Medicare payments made to all hospitals throughout the country for inpatient services. Cape Cod Hosp. v. Sebelius, 677 F.Supp.2d 18, 22 (D.D.C.2009). Congress accomplished this through BBA section 4410(b), which provides: “The Secretary ... shall adjust the area wage index ... in a manner which assures that ... aggregate payments ... in a fiscal year for the operating costs of inpatient hospital services are not greater or less than those which would have been made in the year if [the rural floor] did not apply.”

The five hospitals that are appellants herein challenge how the Secretary has implemented this budget-neutrality provision. Rather than adjusting area wage indexes to achieve budget neutrality, as the hospitals argue the statute requires, the Secretary adjusted the standardized amount. Thus, if the rural floor threatened to increase aggregate payments in a particular year, she applied a downward adjustment to the standardized amount to offset the effect of the rural floor. See Final 2007 Rule, 71 Fed.Reg. at 48,147. The Secretary then carried forward the adjusted standardized amount from year to year, purportedly making further adjustments only as necessary to account for incremental changes in each new year. See id. (explaining that CMS would apply the “budget neutrality adjustment factor[ ] ... to the standardized amount[ ] without removing the effect[ ] of the [prior year's] budget neutrality adjustment[ ]”). The parties contrast this “cumulative” approach of carrying forward prior adjustments and making incremental annual changes with a “noncumulative” approach under which the Secretary would calculate the full amount of the requisite adjustment anew each year. Since the cumulative and noncumulative approaches are simply different methods of making the same arithmetic computation, they should produce identical results if performed correctly. The problem, the hospitals contend, is that the Secretary botched the math, mixing the cumulative and noncumulative methods in a way that gradually decreased Medicare payments for inpatient services over time.

To understand the error the hospitals accuse the Secretary of making, consider the following hypothetical taken from the hospitals' briefs. Imagine an employee normally earns $10 per hour. His employer decides to give him a company car, the value of which equates to compensation of $1 per hour. To avoid an increase in the employee's overall compensation—i.e., to achieve “budget neutrality”—the employer reduces the employee's wage to $9 per hour. Now imagine that next year, the employee receives a nicer car worth $2 per hour. To calculate what the employee's wage should then be to keep his overall compensation at $10 per hour, the employer could use either a cumulative or noncumulative approach. Under the cumulative method, the employer would subtract the $1 incremental increase in the value of the car from the employee's current wage of $9 to arrive at a new, budget-neutral wage of $8. Under the noncumulative approach, the employer would simply subtract the full...