Cape Cod Hosp. v. Sebelius

• Decision Date: 22 December 2009
• Docket Number: Civil Action No. 08-1751 (RCL).
• Citation: 677 F. Supp.2d 18
• Parties: CAPE COD HOSPITAL, et al., Plaintiffs, v. Kathleen SEBELIUS, Secretary, United States Department of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Columbia

677 F.Supp.2d 18

CAPE COD HOSPITAL, et al., Plaintiffs, v. Kathleen SEBELIUS,¹ Secretary, United States Department of Health and Human Services, Defendant.

Civil Action No. 08-1751 (RCL).

United States District Court, District of Columbia.

December 22, 2009.

Christopher L. Keough, Stephanie Ann Webster, King & Spalding, LLP, Washington, DC, for Plaintiffs.

Kathryn L. Wyer, U.S. Department of Justice, Washington, DC, for Defendants.

MEMORANDUM OPINION

ROYCE C. LAMBERTH, District Judge.

Plaintiffs Cape Cod Hospital, Falmouth Hospital Association, Flushing Medical Center, Brookdale University Hospital Medical Center and Jamaica Hospital Center bring this action pursuant to the Administrative Procedure Act (APA), 5 U.S.C. § 702 et al., seeking judicial review of two final rules promulgated by the U.S. Department of Health and Human Services. The rules in dispute determined the rates for inpatient hospital services paid under the Medicare prospective payment system. The first motion presently before the Court concerns two documents offered by the plaintiffs that were not included in the official administrative record for Fiscal Year 2007. The defendant moves to strike these documents as improperly supplementing the administrative record. In addition, both parties have filed motions for summary judgment. For reasons set forth in this opinion, the motion to strike is GRANTED in part and DENIED in part. Defendant's cross-motion for summary judgment is GRANTED. Accordingly, Plaintiff's motion for summary judgment is DENIED.

I. BACKGROUND

A. Medicare Payment for Inpatient Hospital Services

Established in 1965 under Title XVIII of the Social Security Act, 79 Stat. 291, as amended, 42 U.S.C. § 1395 et seq. (1988 ed. and Supp. IV), Medicare is a federally funded health insurance program for the elderly and disabled. Subject to a few exceptions, Congress authorized the Secretary of Health and Human Services (Secretary) to issue regulations defining reimbursable costs and otherwise giving content to the broad outlines of the Medicare statute. § 1395x(v)(1)(A). That authority encompasses the discretion to determine both the "reasonable cost" of services and the "items to be included" in the category of reimbursable services. Thomas Jefferson University v. Shalala, 512 U.S. 504, 507, 114 S.Ct. 2381, 129 L.Ed.2d 405 (1994). However, experience proved that the "reasonable cost" system provided "little incentive for hospitals to keep costs down" because "the more they spent, the more they were reimbursed." Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 974 (D.C.Cir.1991). In the Balanced Budget Act of 1997, Congress changed the payment system for services from a "reasonable cost" to a prospective payment system (PPS). Under PPS, Medicare pays prospectively-established rates for each patient discharge. 42 U.S.C. § 1395ww(d); 71 Fed.Reg. 47870, 47875-76 (Aug. 16, 2006). Plaintiffs are five non-profit hospitals that participate in the Medicare program.

Under the Medicare Act, the amount of reimbursement to a provider hospital for a given service is dependant on the hospital's "average standardized amount" per discharge and the "area wage index" applicable to the hospital. See 42 U.S.C. § 1395ww(d)(2)(C),(D); § 1395ww(d)(3)(E). The standardized amount is the base payment rate per discharge under the PPS according to the particular diagnosis.² 42 U.S.C § 1395ww(d)(3). It is divided into two parts: a labor-related share and a nonlabor-related share. See 42 U.S.C. § 1395ww(d)(3)(E). The Secretary adjusts the labor-related portion of the standardized amount for differences in hospital wage levels in different geographic areas.³ See 42 U.S.C. § 1395ww(d)(3)(E). In order to calculate the relative wage-level adjustment, the Secretary calculates and assigns an area wage index value to each hospital reflecting the relative wage levels in the hospital's geographic location. See 71 Fed.Reg. at 48005; 71 Fed.Reg. 59886, 59903-68 (Oct. 11, 2006). Beginning in 1994, Congress required that the Department of Health and Human Services, through the Centers for Medicare and Medicaid Services (CMS), update wage indexes annually based on wage data information submitted by participating hospitals.

B. The Rural Floor Adjustment

The disparity in payments between urban and rural hospitals caused by differences in the applicable wage indexes has resulted in congressional adjustments. In 1997, Congress enacted legislation requiring the wage index for hospitals located in an urban area to not be less that the wage index for hospitals located in rural areas in the same state. Balanced Budget Act of 1997, Pub.L. No. 105-33, § 4410(a)(BBA), 42 U.S.C. § 1395ww note. The legislation provided that "the area wage index applicable... to any hospital which is not located in a rural area ... may not be less than the area wage index applicable ... to hospitals located in rural areas in the State in which the hospital is located." Id. In other words, where a state's rural hospitals would otherwise have a higher applicable wage index than an urban hospital in the same state, Congress provided that the urban hospital's wage index be raised to match that of the rural hospitals. This adjustment, commonly called the "rural floor," is required to be performed in a budget neutral manner, so that payments in a given fiscal year "are not greater or less than those which would have been made in that year" had the rural floor provision not applied. Id. The effect of the rural floor is to provide payments to some urban hospitals that are greater than would have otherwise been provided to those hospitals. The budget neutrality provision means that any increases in the wage indexes for urban hospitals due to the rural floor must be offset by a corresponding reduction to the wage indexes for rural hospitals so that the total Medicare payments are no greater and no less than they would have been had the rural floor not existed.

Each year, the Secretary publishes proposed changes in the PPS policies and calculations for the upcoming fiscal year in the Federal Register. The Secretary's final changes are published "after such consideration of public comment ... as is feasible in the time available." 42 U.S.C. § 1395ww(e)(5). The CMS's standard procedure is to issue a Proposed Rule that identifies any changes that it proposes to make along with an Addendum to the Proposed Rule that describes the changes. The agency also provides information on "how to obtain data related to the PPS changes and provides the raw wage data to be used for calculations in the current year, as well as hospital wage indexes, and a PPS payment impact file that contains payment adjustment variables that CMS uses when estimating ... payments." Cross-Mot., Summ. J. (citing R08:148-50; R07:143-45).

C. Fiscal Year 2007 Rulemaking Process

CMS issued a proposed rule for FY 2007 on April 25, 2006. The proposed rule set forth specific instructions for submission of comments to those who wished to deliver comments by hand to CMS's Baltimore address. R07:2. The FY 2007 proposed rule directs those who wish to submit comments by hand delivery to the Baltimore office to call staff in advance to schedule their arrival with one of the CMS's regulations staff members so that proper receipt of comments can be assured. Specifically, the proposed rule instructed:

By hand or courier. If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786-7195 in advance to schedule your arrival with one of our staff members. Room 445-G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security Boulevard, Baltimore, MD XXXXX-XXXX. (Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain proof of filing by stamping in and retaining an extra copy of the comments being filed.)

R07:2. According to the FY 2007 rulemaking record submitted by the Secretary, no comments addressing the rural floor adjustment were properly submitted during the FY 2007 comment period.

However, plaintiffs contend there are two additional items that should have been included in the FY 2007 rulemaking record and were left out. The first is an e-mail exchange between the plaintiffs' consultant, Theodore Giovanis, and a CMS employee, Nora Fleming, in which Giovanis asked questions regarding the calculation of rural floor budget neutrality for the acute care prospective payment system in May 2006. The employee responded to the inquiry with a description of how CMS calculates the wage and budget neutrality factor and Giovanis responded by raising a question about the neutrality floor and later requesting a formula that is used in the calculation.

The second document that the plaintiffs submitted in the partial administrative record that is not included in the administrative record certified by the defendant is a comment letter dated June 9, 2006, which was submitted by the plaintiff's same consultant. While the letter has an acknowledgement of receipt by a CMS employee, the defendants did not include the letter as part of the administrative record for FY 2007.

The FY 2007 Final Rule did not adopt any changes to the rural floor adjustment methodology. R07:1225 (71 Fed.Reg. 47870). It also did not address Giovanis' observations about the rural floor adjustment. Instead, it stated that it used the "same method" to calculate the rural floor budget neutrality adjustment that it used in prior years. 71 Fed.Reg. at 48147. The same method described by...