Chw W. Bay v. Thompson, 99-17123

• Citation: 246 F.3d 1218
• Decision Date: 18 April 2001
• Docket Number: No. 99-17123,99-17123
• Parties: (9th Cir. 2001) CHW WEST BAY, dba SETON MEDICAL CENTER, Plaintiff-Appellant, v. TOMMY G.THOMPSON, <A HREF="#fr1-*" name="fn1-*">* Secretary of Health and Human Services, Defendant-Appellee
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1218

246 F.3d 1218 (9th Cir. 2001)

CHW WEST BAY, dba SETON MEDICAL CENTER, Plaintiff-Appellant, v. TOMMY G.THOMPSON, ^* Secretary of Health and Human Services, Defendant-Appellee.

No. 99-17123

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted Feb. 15, 2001

Filed April 18, 2001

Robert Klein, Foley & Lardner, Los Angeles, California, for the plaintiff-appellant.

Richard K. Waterman, Regional Counsel DHHS, San Francisco, California, for the defendant-appellee.

Appeal from the United States District Court for the Northern District of California; Phyllis J. Hamilton, District Judge, Presiding. D.C. No. CV-98-1528 PJH.

Before: Alfred T. Goodwin, Procter Hug, Jr., and William A. Fletcher, Circuit Judges.

GOODWIN, Circuit Judge:

Appellant CHW West Bay, dba Seton Medical Center ("Seton") appeals a summary judgment in favor of Shalala, the Secretary of Health and Human Services ("Secretary"). Seton asserts that the fiscal intermediary and Appellee acted improperly by failing to grant it an incentive payment for successfully keeping its operation costs for the Fiscal Year Ending ("FYE") June 30, 1984 below the year-to-year cost rate of increase ceiling established by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), 42 U.S.C. 1395ww(b). Under TEFRA, the Secretary must (1) grant incentive bonuses to health-care providers that successfully contain the year-to-year increase of their operating costs; and (2) levy penalties on those providers that fail to contain costs. The statute also directs the Secretary to make a downward adjustment to a hospital's operating costs in the event that such costs reflect significant distortions due to, inter alia, changes in the hospital's case-mix index that would otherwise have subjected the provider to a TEFRA penalty. See 42 U.S.C. 1395ww(b)(1).

Seton contends that the Secretary's policy of refusing to make adjustments to cover the full amount of the added costs caused by changes in case-mix, thus denying the provider an incentive payment, subverts the plain meaning of the TEFRA statute and therefore must be overturned. See Chevron USA, Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984). Moreover, Seton argues that, in light of the regulations in effect during FYE June 30, 1984, the Secretary's decision to deny it an incentive payment is arbitrary and capricious in violation of the Administrative Procedure Act (APA), 5 U.S.C. 706(2) (2000), and represents an impermissible interpretation of the statute that must be overturned under the second step of the standard set forth in Chevron. We have jurisdiction pursuant to 42 U.S.C. 1251, and we reverse the summary judgment and remand for further consideration.

BACKGROUND

The Medicare Act, 42 U.S.C. 1395-1395ggg, establishes a system of health insurance for the aged and disabled. The Act also provides for reimbursement for the costs of services rendered to Medicare patients by health care providers such as hospitals, skilled nursing facilities, and home health care agencies. See 42 U.S.C. 1395c-d. Payment to providers of services is commonly carried out by fiscal intermediaries pursuant to contracts with the Secretary. See 42 U.S.C. 1395h. In this case, the fiscal intermediary is Blue Cross of California.

For the cost reporting year involved in this case, the fiscal year beginning July 1, 1983 and ending June 30, 1984, reimbursement for hospital services to Medicare beneficiaries was based on the "reasonable cost" of such services. See 42 U.S.C. 1395f (b)(1). The Medicare Act also contained two separate restrictions on the amount of operating costs that could be reimbursed to providers. The first restriction was an overall limit on a hospital's operating cost per discharge ("CPD") determined by reference to a peer group of similarly situated hospitals. See 42 U.S.C. 1395ww(a). This limit is commonly referred to as the Section 223 limit because it was originally enacted by Section 223 of the 1972 Social Security Act Amendments.

The second limit was adopted by TEFRA, 42 U.S.C. 1395ww(b), and is referred to as the TEFRA limit. The purpose of the TEFRA limit is to restrict the amount by which an individual hospital's costs can grow from one year to the next. The TEFRA limit is based on a "target amount," defined as the hospital's CPD during a base period which is increased each year by an inflation factor plus one percent. See 42 U.S.C. 1395ww(b)(3)(A),(B); Foothill Presbyterian Hosp. v. Shalala, 152 F.3d 1132, 1133 (9th Cir. 1998). A hospital whose costs exceed the target amount is penalized--it is paid only its costs up to the target amount plus 25% of the costs which exceed that amount. (Thus, a TEFRA "penalty "is in fact partial payment for actual costs above the target amount). A hospital whose costs are below the target amount is entitled to an incentive bonus equal to 50% of the difference between its actual operating costs for the year and the target amount, or 5% of the target amount, whichever is less. See 42 U.S.C. 1395ww(b)(1).

The Secretary is directed by the statute to provide a method for recognizing the effects of significant distortions between a hospital's cost in its base period and its costs during the cost-reporting period under review. See 42 U.S.C. 1395ww(a)(2). The Secretary promulgated regulations at 42 C.F.R. 405.56(f)-(h) (1983) and 42 C.F.R. 405.463(f)-(h) (1983) providing for a system of exemptions, exceptions, and adjustments to account for the various distortions that may be reflected in a provider's operating costs.

At the close of its fiscal year, a provider must submit a "cost report" showing its costs incurred during the fiscal year and the appropriate portion of those costs to be allocated to Medicare. 42 C.F.R. 413.20(b) and 413.24(f) (1983). The fiscal intermediary then analyzes and audits the report, and informs the provider of the determination of the amount of Medicare reimbursement. 42 C.F.R. 405.1803. In the event a provider is dissatisfied with this determination, it may appeal the decision to the Provider Reimbursement Review Board ("PRRB"). See 42 U.S.C. 1395oo(a). The decision of the PRRB is final unless the Secretary reverses, affirms, or modifies it within 60 days of the provider's receipt of the PRRB decision. See 42 U.S.C. 1395oo(f)(1).

A provider may request an exemption, exception, or adjustment within 180 days of the intermediary's determination "where events beyond the hospital's control or extraordinary circumstances ... create a distortion in the increase in costs for a cost reporting period" or where the Secretary otherwise "deems appropriate." 42 U.S.C. 1395ww(b)(4)(A); 42 C.F.R. 413.40(e). After such request, the fiscal intermediary makes a recommendation to the Health Care Finance Administration ("HCFA"), which makes the decision. 42 C.F.R. 413.40(e)(2), (3). A provider may obtain judicial review of a final administrative decision by filing suit in district court within 60 days of receipt of the decision. Id.

Seton is a not-for-profit acute care hospital located in Daly City, California. During its cost reporting period ending June 30, 1983, Seton incurred a Medicare cost per discharge of $ 4,751.14. For purposes of determining the TEFRA limit, FYE 6/30/83 was Seton's base year. The target amount for FYE 6/30/84, based on the base period CPD, was $ 5,078.97 per discharge, factoring in the appropriate inflation index plus 1%. The target amount was subsequently increased to $ 5,186.25 per case.

During FYE June 30, 1984, Seton incurred a CPD of $ 5,423.33. Its costs therefore exceeded both its Section 223 limit and the TEFRA target amount. The fiscal intermediary determined that Seton was subject to a TEFRA penalty, and disallowed 75% of the amount by which Seton's CPD exceeded the limit. Seton filed a timely appeal to the PRRB regarding the intermediary's determination, and submitted a separate application to the HCFA for an exception and adjustment. The HCFA determined that the provider's increase in CPD for FYE June 30, 1984 reflected cost distortions resulting from a substantial increase in its case mix index. This increase was due to a dramatic change in its services, including an expansion in cardiovascular surgery, cardiac rehabilitation, and diagnostic services that resulted from the addition to its staff of two prominent cardiologists.

For this reason, HCFA determined that Seton qualified for an adjustment, and adjusted the TEFRA limit so that it matched Seton's actual costs, thereby erasing the penalty that Seton would have had to pay for the costs above the TEFRA limit. However, HCFA did not increase the target amount by the full amount attributable to the change in case mix, on the ground that exceptions or adjustments to the target amount could not be granted if the approval would create a TEFRA incentive payment.

Dissatisfied with the HCFA ruling, Seton continued pursuit of its PRRB appeal. In a unanimous decision, the PRRB agreed with Seton's contention that it was entitled to an adjustment in the inpatient operating cost limit to reflect the entire change in case mix. The PRRB interpreted the relevant regulations to mean that when a significant cost distortion beyond a provider's control is recognized, the operating costs are adjusted, not the TEFRA target limit. The PRRB therefore concluded that the Secretary's decision to adjust the TEFRA target amount to equal the provider's CPD--thereby precluding the application of incentive payments to adjustments--was unreasonable. According to the PRRB, Seton's CPD should have been adjusted downward by $ 673.61 per discharge to account for the full amount of the cost distortions, and Seton was therefore entitled to an incentive payment in the amount of $ 872,425.

The Intermediary requested review of the PRRB's decision, and on February 6, 1998, the Administrator of the HCFA reversed. The Administrator found that the...