Community Hosp. of Chandler, Inc. v. Sullivan

• Decision Date: 10 July 1992
• Docket Number: No. 90-16331,90-16331
• Citation: 963 F.2d 1206
• Parties: , Medicare & Medicaid Guide P 40,233 COMMUNITY HOSPITAL OF CHANDLER, INC., an Arizona Corporation, d/b/a Chandler Regional Hospital, Plaintiff-Appellant, v. Louis W. SULLIVAN, M.D., in his official capacity as Secretary of the United States Department of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1206

963 F.2d 1206

37 Soc.Sec.Rep.Ser. 293, Medicare & Medicaid Guide

P 40,233

COMMUNITY HOSPITAL OF CHANDLER, INC., an Arizona Corporation, d/b/a Chandler Regional Hospital Plaintiff-Appellant, v. Louis W. SULLIVAN, M.D., in his official capacity as Secretary of the United States Department of Health and Human Services, Defendant-Appellee.

No. 90-16331.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Feb. 11, 1992.

Decided May 4, 1992.

As Amended July 10, 1992.

Patrick K. O'Hare, Amy E. Hancock, McDermott, Will, & Emery, Washington, D.C., and Douglas Gerlach, Brown & Bain, Phoenix, Ariz., for plaintiff-appellant.

Stuart Gerson, Asst. Atty. Gen., James P. Loss, Asst. U.S. Atty., Phoenix, Ariz., Lawrence M. Meister, Office of the Gen. Counsel, Dept. of Health and Human Services, Baltimore, Md., for defendant-appellee.

Appeal from the United States District Court for the District of Arizona.

Before: FLETCHER, D.W. NELSON and FERNANDEZ, Circuit Judges.

D.W. NELSON, Circuit Judge:

OVERVIEW

Until 1984, Chandler Community Hospital operated in a single-story, 46-bed, small-scale facility. That year, the original facility was closed down and the operation was transferred to a brand-new, four-story, 120-bed, state-of-the-art facility that had been constructed at a nearby location. The new facility was renamed "Chandler Regional Hospital," but it kept the same licenses as the old facility; it was also owned and operated by the same individuals. The new facility had substantially higher per-patient operating costs than the old facility.

This case raises two questions. First, we must decide whether, for the purpose of calculating Medicare reimbursements, the Secretary of Health and Human Services' ("the Secretary") determination that the new facility is not a "new hospital" within the meaning of 42 C.F.R. § 412.74(a)(1) frustrates the Congressional intent behind the Medicare Act. Second, we must determine whether, if the interpretation of the new hospital regulation was valid, the Secretary was nonetheless required, under 42 U.S.C. § 1395ww(b)(4)(A), to otherwise adjust Chandler's reimbursement rate to take into consideration the radical shift in its operating costs.

We hold that neither 42 C.F.R. § 412.74(a)(1) nor the Secretary's interpretation of that regulation to exclude Chandler from characterization as a new hospital frustrate Congressional intent. However, we find that the Secretary erred in not adjusting Chandler's base year costs as required by 42 U.S.C. § 1395ww(b)(4)(A). Therefore, we reverse the district court and remand this case so that the Secretary may have an opportunity to determine whether and to what extent Chandler is entitled to adjustments under that provision. 744 F.Supp. 203. (D.Ariz.1990).

FACTS/PROCEDURAL BACKGROUND

Overview of the Medicare Program

In 1983, Congress amended the Social Security Act to change the way it reimburses hospitals for the costs of treating Medicare patients. Before 1983, hospitals were reimbursed according to the actual costs they expended in treating each Medicare patient. Concluding that this cost-based system was inefficient because hospitals had no incentive to provide services at lower costs, Congress introduced the Prospective Payment System (PPS). Under PPS, hospitals receive a fixed, standard amount for each Medicare inpatient they treat. The amount of the payment is adjusted for each patient by using "diagnosis-related groups" (DRGs), a classification system based on the patient's condition and treatment. This amount is theoretically equal to the "average" cost per patient. Hospitals receive the per patient DRG amount no matter how much each spends on a given patient. Hospitals that treat patients for less than the DRG amount get "rewarded," while hospitals that spend more than the DRG amount must absorb the excess costs.

Recognizing that the PPS system might create financial disruption for hospitals accustomed to cost-based reimbursement, Congress designated a four-year transition period to help hospitals ease into the new system. For those four years, Congress based a hospital's reimbursement on a formula incorporating both the PPS payment amount and an amount reflecting that particular hospital's past operating costs (the hospital-specific portion--"HSP"). Congress directed the Secretary to base the HSP on a hospital's costs for a "base-year" period of twelve months ending on or before September 30, 1983. Congress further directed that the HSP share of the formula be gradually reduced to zero over the course of the four-year transition period; correspondingly, the PPS amount was to rise to 100 percent.

Congress recognized that for a small number of hospitals, such as new hospitals, there would be no historical cost experience from which to calculate the HSP. Although Congress passed no statute directly addressed to hospitals falling in this category, the legislative history indicates that Congress intended that the Secretary "make appropriate provision for applying a prospective payment system." H.R.Rep. No. 25, 98th Cong., 1st Sess. 137, reprinted in 1983 U.S.Code Cong. & Admin.News 219, 356. Accordingly, the Secretary issued 42 C.F.R. § 412.74(a). This regulation defines "new hospitals" as follows:

(a) For purposes of this section, a new hospital is a hospital that meets either of the following requirements:

(1) The hospital--

(i) Is newly participating in the Medicare program (under previous and present ownership); and

(ii) Does not have a 12-month cost reporting period ending before September 30, 1983.

(2) The hospital is under new ownership and can document to the satisfaction of its intermediary that--

(i) Its base period reflects previous ownership and control under which the hospital's operation was deliberately phased out in expectation of sale or termination of operations;

(ii) Its occupancy rate during the current period is 150 percent of the occupancy rate during the base year;

(iii) Previous ownership and management took deliberate steps to curtail services in the base period by reducing operations, laying off or transferring employees to non-inpatient areas, reducing physician staff, and reducing inpatient admissions; and

(iv) The change in ownership and the corresponding growth in inpatient services and occupancy occurred between the base period and the first prospective payment period.

42 C.F.R. § 412.74(a). At issue in this case is 42 C.F.R. § 412.74(a)(1), as it is this definition of "new hospital" that Chandler contends it satisfies. The Secretary determined that because such facilities had no historical cost experience, they would be reimbursed from the outset at the PPS rate. 42 C.F.R. § 412.74(b). ¹

Community Hospital of Chandler/Chandler Regional Hospital

Chandler Community Hospital ("CCH"), a single-story facility located on a five-acre site, was opened in 1962. CCH was licensed for 46 beds, divided between four-bed wards and semi-private rooms. CCH closed in 1984, just before Chandler Regional Hospital ("Chandler") was opened.

Chandler is a four-story, "state-of-the-art-facility" which occupies 40 acres and is located about seven miles from the site of the old facility. Chandler is licensed for 120 beds, all in private rooms. Chandler has a 12-bed intensive care unit, an 8-bed maternity unit, a 15-bed pediatric unit and a 15-bed cardiac care unit, and it provides numerous other services not available at CCH. Chandler treats twice as many patients as CCH did, and employs a staff more than twice as large.

The administrators of CCH planned and oversaw the construction and opening of Chandler. When CCH closed in March 1984, its patients were simply transferred to Chandler. Rather than obtain new Medicare certification, Chandler's management asked the state licensing authorities to "transfer" CCH's Medicare certification to Chandler. And rather than file separate annual cost reports with Medicare, management "combined" the costs of CCH and Chandler in a single 1984 report.

Carrying out his mandate under Congressional directives, the Secretary calculated Chandler's reimbursement rate for the four-year transition period by determining that Chandler's "base-year" would be the cost year ending in December 12, 1982. In 1982, of course, the new facility did not exist; the selected base-year reflects costs incurred at CCH. Although Chandler and the Secretary disagree on the extent of the disparity, there is little question that the base-year on which the Secretary based Chandler's HSP is unrepresentative of Chandler's actual annual operating costs for the transition period. The resulting reimbursement rate is lower than the PPS reimbursement rate.

Proceedings Below

Seeking to recover additional Medicare money, Chandler filed a complaint with its fiscal intermediary. Chandler argued that it did not have an appropriate "historical cost experience," and therefore it qualified as a hospital for which the Secretary should "make appropriate provision for applying a prospective payment system." Specifically, Chandler argued that as it was both "newly participating in the Medicare program" and did not have "a 12-month cost reporting period ending before September 30, 1983," it met the definition of a "new hospital" reflected in 42 C.F.R. § 412.74(a)(1). On instructions from the Health Care Financing Administration ("HCFA") (the Secretary's designee), the fiscal intermediary denied Chandler's request to be treated as a new hospital. Chandler appealed the HCFA's decision to the Provider Reimbursement Review Board (PRRB) pursuant to 42 U.S.C. § 1395oo. In a 3-1 decision, the PRRB held that Chandler did not meet the definition of "new hospital." The dissenting member of the PRRB opined that not only did Chandler qualify as a "new hospital" under 42 C.F.R. § 412.74(a)(1), but also that the Secretary's failure somehow to compensate for Chandler's unique cost situation violated 42 U.S.C. § 1395ww(b...