County of Los Angeles v. Leavitt

• Decision Date: 31 March 2008
• Docket Number: No. 06-55222.,06-55222.
• Citation: 521 F.3d 1073
• Parties: COUNTY OF LOS ANGELES, Plaintiff-Appellant, v. Michael O. LEAVITT, Secretary of the United States Department of Health and Human Services, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

521 F.3d 1073

COUNTY OF LOS ANGELES, Plaintiff-Appellant, v. Michael O. LEAVITT, Secretary of the United States Department of Health and Human Services, Defendant-Appellee.

No. 06-55222.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 6, 2007.

Filed March 31, 2008.

Tami S. Smason, Foley & Lardner LLP, Los Angeles, CA, for the plaintiff-appellant.

John S. Koppel, United States Department of Justice, Civil Division, Washington, D.C., for the defendant-appellee.

Appeal from the United States District Court for the Central District of California; Terry J. Hatter, Chief District Judge, Presiding. D.C. No. CV-04-04236-TJH.

Before: B. FLETCHER, STEPHEN REINHARDT, and PAMELA ANN RYMER, Circuit Judges.

Opinion by Judge RYMER; Dissent by Judge REINHARDT.

RYMER, Circuit Judge:

This appeal, which involves Medicare reimbursement of indirect medical education expenses (IME) incurred by a public teaching hospital with an approved intern and resident program, presents two questions: first, whether it was arbitrary and capricious for the Secretary of Health and Human Services to interpret the Medicare statute and regulations providing for IME payment on the basis of "available beds" as presumptively meaning physical beds, when the hospital's fiscal intermediary had previously accepted a calculation based on budgeted beds; and second, whether the Secretary's findings in this case were supported by substantial evidence.

Los Angeles County/University of Southern California Medical Center (County/USC or Med Center) appeals the district court's judgment upholding a final determination by the Provider Reimbursement Review Board (PRRB) that County/USC's intermediary, Blue Cross and Blue Shield Association (Blue Cross), properly used a physical bed count in the formula for calculating the hospital's IME adjustment for fiscal year ending (FYE) June 30, 1994. We conclude that the Secretary had discretion to presume that "available beds" means actual beds, rather than budgeted beds. We owe deference to this interpretation. Applying it, we conclude that the PRRB could find, based on the record, that County/USC failed to carry its burden of proving that beds in excess of the budgeted bed figure should be excluded from the physical count. Substantial evidence supports the PRRB's decision because the actual number of beds at County/USC that were physically ready to be occupied was not in dispute, and there was evidence that all beds at the hospital — whether budgeted or not — were maintained and could be used at any time for patient care. Accordingly, the Secretary's determination was not arbitrary and capricious.

I

All hospitals with a provider agreement receive predetermined payments for discharged patients under the "prospective payment system" (PPS).¹ As a teaching hospital subject to PPS, County/USC is entitled to an additional payment to cover the added, indirect costs of medical education. 42 U.S.C. § 1395w(d)(5)(B) (2006). The amount of the IME adjustment is based on a hospital's ratio of full-time equivalent interns and residents to available beds.

The calculation is complicated, but the bottom line is that the higher the number of beds, the lower the eventual payment and vice versa. See Little Co. of Mary Hosp. & Health Care Ctrs. v. Shalala, 165 F.3d 1162, 1164 (7th Cir.1999).²

The Social Security Act caps this ratio at the ratio of interns and residents to "available beds (as defined by the Secretary)" during the hospital's most recent cost reporting period. 42 U.S.C. § 1395ww(d)(5)(B)(vi).

The implementing regulation provides, in pertinent part:

For purposes of this section, the number of beds in a hospital is determined by counting the number of available bed days during the cost reporting period, not including beds or bassinets in the healthy newborn nursery, custodial care beds, or beds in distinct part hospital units, and dividing that number by the number of days in the cost reporting period.

42 C.F.R. 412.105(b) (1993).³

The Provider Reimbursement Manual (PRM) issued by the Health Care Financing Administration (HCFA),⁴ which administers the medicare program for the Secretary, defines "available beds" for purposes of the IME adjustment:

A bed is defined for this purpose as an adult or pediatric bed (exclusive of beds assigned to newborns which are not in intensive care areas, custodial beds, and beds in excluded units) maintained for lodging inpatients, including beds in intensive care units, coronary care units, neonatal intensive care units, and other special care inpatient hospital units. Beds in the following locations are excluded from the definition: hospitalbased skilled nursing facilities or in any inpatient area(s) of the facility not certified as an acute care hospital, labor rooms, PPS excluded units such as psychiatric or rehabilitation units, post anaesthesia or postoperative recovery rooms, outpatient areas, emergency rooms, ancillary departments, nurses' and other staff residences, and other such areas as are regularly maintained and utilized for only a portion of the stay of patients or for purposes other than inpatient lodging.

To be considered an available bed, a bed must be permanently maintained for lodging inpatients. It must be available for use and housed in patient rooms or wards (i.e., not in corridors or temporary beds). Thus, beds in a completely or partially closed wing of the facility are considered available only if the hospital put [sic] the beds into use when they are needed. The term "available beds" as used for the purpose of counting beds is not intended to capture the day-to-day fluctuations in patient rooms and wards being used. Rather, the count is intended to capture changes in the size of a facility as beds are added to or taken out of service.

HCFA Pub. 16-1 § 2405.3G (Rev. 345); PRM, § 2405.3G (Adjustment for the Indirect Cost of Medical Education) (August 1988).⁵

Blue Cross also published an Administrative Bulletin which pertains to the IME adjustment. It indicates how to treat areas of a hospital that are temporarily or permanently closed:

In a situation where rooms or floors are temporarily unoccupied, the beds in these areas must be counted, provided the area in which the beds are contained is included in the hospital's depreciable plant assets, and the beds can be adequately covered by either employed nurses or nurses from a nurse registry. In this situation, the beds are considered "available" and must be counted even though it may take 24-48 hours to get nurses on duty from the registry.

Administrative Bulletin No.1841, 88.01 (November 18, 1988).

Against this backdrop, a provider of covered care such as County/USC submits a cost report to its fiscal intermediary each year. An intermediary — in this case, Blue Cross — is a private entity with whom the Secretary contracts to determine the amount of Medicare payments to be made to a provider based on the cost report. The report shows the costs incurred during the fiscal year and what proportion is to be allocated to Medicare. A provider that is dissatisfied with the intermediary's determination may request a hearing before the PRRB. 42 U.S.C. § 1395oo(a); 42 C.F.R. § 405.1835.

County/USC is one of six acute care hospitals owned and operated by Los Angeles County. It is a major teaching hospital. The maximum amount of services available each year is based on a budget approved by the Los Angeles County Board of Supervisors. The number of "budgeted beds" for a given fiscal year is an estimate of how far the budget will stretch, or how many beds the hospital can afford to supply with all the necessary services and goods for patient care.

County/USC had used budgeted beds for calculating its IME payment since 1986. For FYE June 30, 1994, however, Blue Cross determined that the cost report understated the number of beds physically available in the hospital's inpatient areas, and therefore increased the count. County/USC appealed to the PRRB. Prior to the evidentiary hearing, the parties stipulated that the number of beds physically located in the hospital during the FYE June 30, 1994 was 1,320 and that the number of budgeted beds was 1,197. Thus, 123 beds are at issue.

The PRRB concluded that Blue Cross properly used the number of physical beds located within County/USC's facility as a measure of the available beds. It found that the number of budgeted beds was not an absolute cap on bed utility because on any given day the budgeted cap of 1,197 may have been exceeded. Finally, the Board found no evidence that County/USC closed floors or areas of the hospital.⁶

County/USC appealed to the Secretary, who declined review. The PRRB's decision thus became the final administrative action for purposes of federal jurisdiction. 42 U.S.C. § 1395oo(f) (1993). The Med Center sought review in the district court, which granted summary judgment in favor of the Secretary. This timely appeal followed.

II

Judicial review of a decision of the PRRB is pursuant to the Administrative Procedures Act (APA). For this reason, we may not set aside its findings or conclusions unless they are "unsupported by substantial evidence," 5 U.S.C. § 706(2)(E) (1966), or are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." Id. § 706(2)(A); Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512, 114 S.Ct. 2381, 129 L.Ed.2d 405 (1994).

Courts must defer to an administrative agency's reasonable construction of a statute unless Congress has spoken unambiguously. Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-45, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). "[A]n agency violates the APA if it has `relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could...