Clark Regional v. U.S. Dept. of Health

• Decision Date: 11 December 2002
• Docket Number: No. 01-5658.,01-5658.
• Citation: 314 F.3d 241
• Parties: CLARK REGIONAL MEDICAL CENTER; Pattie A. Clay Hospital, Plaintiffs-Appellees, v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

314 F.3d 241

CLARK REGIONAL MEDICAL CENTER; Pattie A. Clay Hospital, Plaintiffs-Appellees, v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Defendant-Appellant.

No. 01-5658.

United States Court of Appeals, Sixth Circuit.

Argued: September 13, 2002.

Decided and Filed: December 11, 2002.

Appeal from the District Court for the Eastern District of Kentucky, Karl S. Forester, Chief Judge.

Alan C. Guild, Jr. (briefed), Sharon K. Hager (briefed), Hall, Render, Killian, Heath & Lyman, Louisville, KY, Keith D. Barber (argued), Hall, Render, Killian, Heath & Lyman, Indianapolis, IN, for Plaintiffs-Appellees.

Frances E. Catron (briefed), U.S. Attorney, Lexington, KY, Anthony J. Steinmeyer (briefed), U.S. Department of Justice, Civil Division, Apellate Section, Washington, DC, Howard H. Lewis (briefed), Department of Health and Human Services, Office of the General Counsel, Atlanta, GA, Linda S. Wernery (argued and briefed), U.S. Department of Justice, Office of Immigration Litigation, Washington, DC, for Defendants-Appellants.

Before: BOGGS and COLE, Circuit Judges; BELL, Chief District Judge.^*

OPINION

COLE, Circuit Judge.

This dispute is about whether hospital beds licensed for acute inpatient care, but used for other purposes when not needed by inpatients, may be counted for purposes of a Medicare program designed to reimburse certain hospitals based on the number of available beds. Specifically, the Medicare program, administered by the United States Department of Health and Human Services ("Department"), provides for a supplemental payment to be made to "disproportionate share" hospitals. Disproportionate share hospitals are hospitals located in certain areas, which provide a qualifying percentage of their services to low-income patients. Whether a hospital is eligible for this payment is based in part on the number of beds it has available for inpatient care. The plaintiffs in this case are two Kentucky hospitals, Clark Regional Medical Center ("Clark Regional") and Pattie A. Clay Hospital ("Clay") (together "Plaintiffs"). Plaintiffs allege that the Department arbitrarily and capriciously violated its own regulations for counting beds when it denied them reimbursement based on the provision of medical services to low-income patients. The Department responds that it is entitled to deference in construing its own rules, especially when that construction is the result of an administrative hearing process, as it was in this case. The Department insists that its decision not to count the disputed beds can be reconciled with its promulgated rules, and consequently that this appeal should be dismissed.

Because we find that the Director's interpretation of the applicable regulation arbitrary and capricious, we AFFIRM the judgment of the district court.

I. BACKGROUND

A. Factual and Statutory Background

Plaintiffs are two hospitals located in eastern Kentucky that provide inpatient care to Medicare and low-income patients. Clark Regional is licensed by the Commonwealth of Kentucky for 100 acute care beds. Clay is licensed for 105 acute care beds. Both facilities are also certified by the Department as "swing-bed" facilities, which means that they may, when necessary, use a designated number of acute care beds to provide post-hospital skilled nursing facility ("SNF") care on a temporary basis.¹ Both facilities also use their acute care beds for patient "observation" to determine whether a patient should be admitted to the hospital. Plaintiffs state that during the time at issue they used approximately 10% of their acute care beds for observation and SNF care patients. However, on any given day, the beds at issue were used for observation and for SNF care only when not in use for acute care.

Whether the observation and swing beds were available for acute care patients is critical to whether Plaintiffs receive certain significant benefits under Medicare. Medicare is divided into two parts — Part A and Part B. Part A covers a large number of inpatient services. Part A provides reimbursement under a cost-control regime called the prospective payment system ("PPS"). In particular, Title VI of the Social Security Amendments of 1983 added § 1886(d) to the Social Security Act establishing PPS for the reimbursement of inpatient hospital operating costs for all items and services provided to Medicare beneficiaries other than physician's services associated with each discharge. Social Security Amendments of 1983, Pub.L. No. 98-21, 97 Stat. 65 (1983). Reimbursement under PPS is based on prospectively determined national and regional rates for each discharge, rather than reasonable operating costs or the hospital's actual costs. 42 U.S.C. § 1395ww(d). Congress implemented PPS to reform the financial incentives faced by hospitals in order to promote efficiency and reward cost-effective hospital practices. H.R.Rep. No. 98-25(I), at 132, reprinted in 1983 U.S.C.C.A.N. 219, 351.

Part B is a voluntary insurance program, and covers outpatient care services. Outpatient services include pre-admission "observation" of patients, 42 U.S.C. § 1395x(s)(2)(B), and are excepted from PPS. SNF care beds, although technically categorized under Part A, are also excepted from PPS. See 42 U.S.C. § 1395tt; 42 C.F.R. §§ 409.10, 413.114 (1995).

Congress recognized, however, that payment under PPS may not account for the added costs incurred by hospitals that treat a disproportionate number of low-income patients. H.R.Rep. No. 98-25(I), at 141, reprinted in 1983 U.S.C.C.A.N. 219, 360. In particular, Congress found, based on comprehensive analysis of cost data, that "the only hospitals that demonstrated a higher medicare cost per case associated with disproportionate share of low-income patients were urban hospitals with over 100 beds." H.R.Rep. No. 99-241, at 17, reprinted in 1986 U.S.C.C.A.N. 594, 595; cf. Alhambra Hosp. v. Thompson, 259 F.3d 1071, 1075-76 & n. 5 (9th Cir.2001). Therefore, Congress authorized the disproportionate share hospital adjustment ("DSH adjustment"), 42 U.S.C. § 1395ww(d)(5)(F), which provides additional payment to qualifying hospitals.

To be eligible for this additional payment, a hospital must meet certain criteria concerning its location and bed size. For hospitals in urban areas with 100 or more beds, hospitals must have 15% low-income patients to be eligible for the DSH adjustment. See 42 U.S.C. § 1395ww(d)(5)(F)(v)(I). For urban hospitals with fewer than 100 beds, the low-income patient threshold is 40%. See 42 U.S.C. § 1395ww(d)(5)(F)(v)(III). It is undisputed that the Plaintiffs qualify as urban hospitals. At issue in this case is how many of the 100 beds at Clark Regional and 105 beds at Clay may be counted toward the 100 beds required to be eligible for the 15% low-income patient threshold.

B. Procedural Background

Clark Regional qualified for the DSH adjustment for fiscal years 1992 through 1995; Clay qualified for the adjustment for fiscal years 1993 through 1995. In June of 1997, however, the Department's agent, known as a fiscal intermediary, concluded that the method by which it had been counting beds was incorrect. The fiscal intermediary informed Plaintiffs that swing beds and observation beds could no longer be counted as part of the total number of beds for purposes of the DSH adjustment. As a result, both hospitals fell below the 100 beds required for the 15% low-income patient threshold. Because neither hospital met the more stringent 40% low-income patient requirement, Plaintiffs were no longer eligible for the DSH adjustment. In addition, because Plaintiffs would not have previously qualified for the DSH adjustment without the inclusion of the observation and SNF beds, the fiscal intermediary told Plaintiffs they must return $5,092,243 previously paid to the hospitals by the Department.

Plaintiffs filed an appeal with the Provider Reimbursement Review Board ("PRRB"), an administrative body established to hear disputes between providers and fiscal intermediaries. See 42 U.S.C. § 1395oo(a), (h). After conducting a hearing, and reviewing the applicable administrative guidelines, the PRRB concluded that "[t]he [Fiscal] Intermediary did not properly determine that the [Plaintiffs] had less than 100 beds for the fiscal years in question" and reversed the fiscal intermediary's decision.

The Department subsequently appealed the PRRB's decision to the Health Care Financing Administration ("HCFA"). See 42 U.S.C. § 1395oo(f). The HCFA reversed, noting that the "HCFA has a long-standing policy of only considering bed days in the bed count if the costs of such days were allowable in the determination of Medicare inpatient costs." Because swing beds and observation beds are not reimbursed for purposes of inpatient services under PPS, the HCFA reasoned that the counting of beds for purposes of the DSH adjustment should be limited to beds "which are recognized as part of the PPS hospital's inpatient operating costs."

Plaintiffs filed suit in the United States District Court for the Eastern District of Kentucky seeking review of the HCFA's decision. See 42 U.S.C. § 1395oo(f). Plaintiffs argued that the HCFA's decision was arbitrary and capricious because, among other things, it violated the Department's own rules on how to count beds for purposes of the DSH adjustment. Specifically, Plaintiffs alleged that the Department's interpretation of 42 C.F.R. § 412.105(b), which governs the counting of beds for purposes of the DSH adjustment, was arbitrary and capricious because it did not comport either with the language of the regulation itself, or the Department's "Provider Reimbursement Manual," which clarifies how to count beds.

The district court agreed, finding that (1) the "plain meaning" of 42 C.F.R. § 412.105(b) required that all beds not specifically excepted should be counted in the eligibility calculation; (2) HCFA's own Provider Reimbursement Manual ("PRM") guidelines supported the inclusion of...