County of LA. v. Shalala

Decision Date01 October 1999
Docket Number98-5328,No. 98-5254,98-5259,98-5260,98-5256,98-5331,98-5332,98-5325,Nos. 98-5255,98-5257,98-5333,98-5329,98-5261,98-5262,98-5327,98-5258,98-5330,98-5326,98-5254,s. 98-5255
Citation192 F.3d 1005
Parties(D.C. Cir. 1999) County of Los Angeles, a political subdivision of the State of California, owner and operator of Los Angeles County/USC Medical Center, Harbor/UCLA Medical Center, Martin Luther King Jr./Drew Medical Center, Olive View Medical Center and High Desert Hospital, et al. Appellees/Cross-Appellants v. Donna E. Shalala, Secretary, U.S. Department of Health and Human Services Appellant/Cross-Appellee Consolidated with
CourtU.S. Court of Appeals — District of Columbia Circuit

[Copyrighted Material Omitted]

                     Appeals from the United States District Court for the District of Columbia
                        (No. 93cv00146)         (No. 93cv00147)         (No. 93cv00479)
                        (No. 93cv00692)         (No. 93cv00836)         (No. 93cv00837)
                        (No. 93cv01188)         (No. 93cv02069)         (No. 94cv01485)

Peter R. Maier, Attorney, United States Department of Justice, argued the cause for appellant/cross-appellee. With him on the briefs were Frank W. Hunger, Assistant Attorney General, Wilma A. Lewis, United States Attorney, and Barbara C. Biddle, Attorney, United States Department of Justice.

Lloyd A. Bookman argued the cause for appellees/crossappellants. With him on the briefs were David H. Eisenstat, Byron J. Gross, John R. Hellow, Michael G. Hercz, John R. Jacob, and David B. Palmer.

Before: Wald, Silberman, and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Wald.

Wald, Circuit Judge:

Brought by the owners of Medicare provider hospitals ("Hospitals") and the Secretary of Health and Human Services ("Secretary"), these cross-appeals present two issues. First, under the Medicare statute, must the Secretary provide hospitals with retroactive reimbursements to ensure that aggregate outlier payments during any given fiscal year meet minimum statutory targets? And second, has the Secretary adequately explained why, when calculating outlier thresholds for fiscal years 1985-1986, she relied on a 1981 database instead of more contemporaneous records from 1984 Medicare discharges? Finding that Congress had spoken directly and unambiguously to the first question, the district court granted partial summary judgment to the Hospitals. With respect to the second issue, however, the court perceived nothing unreasonable in the Secretary's choice of data, and entered judgment accordingly for the Secretary. Because we disagree with the district court on both points, we now reverse.

I. Background

Through a "complex statutory and regulatory regime," Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404 (1993), the Medicare program reimburses qualifying hospitals for the services that they provide to eligible patients. See Social Security Act, Pub. L. No. 89-97, tit. XVIII, 79 Stat. 286, 291 (1965) (codified as amended at 42 U.S.C. §§ 1395-1395ggg (1994 & Supp. III 1997)). From its inception in 1965 until October 1983, Medicare compensated hospitals for the "reasonable costs" of the inpatient services that they furnished. See 42 U.S.C. § 1395f(b). Experience proved, however, that this system bred "little incentive for hospitals to keep costs down" because "[t]he more they spent, the more they were reimbursed." Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 974 (D.C. Cir. 1991).

To stem the program's escalating costs and perceived inefficiency, Congress fundamentally overhauled the Medicare reimbursement methodology in 1983. See Social Security Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat 65, 149. Since then, this new regime, known as the Prospective Payment System ("PPS"), has reimbursed qualifying hospitals at prospectively fixed rates. By establishing predetermined reimbursement rates that remain static regardless of the costs incurred by a hospital, Congress sought "to reform the financial incentives hospitals face, promoting efficiency in the provision of services by rewarding cost/effective hospital practices." H.R. Rep. No. 98-25, at 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351.

Calculating prospective-payment rates begins with determining the "federal rate," a standard nationwide cost rate based on the average operating costs of inpatient hospital services. See 42 U.S.C. § 1395ww(d)(2)(A)-(B); 49 Fed. Reg. 234, 251 (1984). To account for regional variations in labor costs, the Secretary then establishes a wage index that augments the adjusted standardized payment depending on the location of a qualifying hospital. § 1395ww(d)(2)(H), (d)(3)(E). The final variable is an additional weighting factor that reflects the disparate hospital resources required to treat major and minor illnesses. § 1395ww(d)(4). For each of 470 medical conditions--known as diagnosis related groups or "DRGs"--the Secretary assigns particular weights by which the federal rate is to be multiplied. The more complicated and costlier the treatment is, the greater the weight assigned to that particular DRG will be. To calculate the final "DRG prospective payment rate" for a patient discharge, the Secretary takes the federal rate, adjusts it according to the wage index, and then multiplies it by the weight assigned to the patient's DRG. By statutory mandate, the Secretary must publish the weights and values that she will factor into the prospective-payment calculus before the start of each fiscal year. § 1395ww(d)(6).

Despite the anticipated virtues of PPS, Congress recognized that health-care providers would inevitably care for some patients whose hospitalization would be extraordinarily costly or lengthy. To insulate hospitals from bearing a disproportionate share of these atypical costs, Congress authorized the Secretary to make supplemental "outlier payments." During the years at issue in these cross-appeals, the outlier-payment provisions were set forth in four clauses of the Medicare statute. 42 U.S.C. § 1395ww(d)(5)(A)(i)-(iv) (Supp. IV 1986). With the first two clauses, Congress established two classes of outlier payments: day outliers and cost outliers. § 1395ww(d)(5)(A)(i)-(ii). A hospital could qualify for a day-outlier payment if the patient's length of stay exceeded the mean length of stay for that particular DRG by a fixed number of days or standard deviations .s 1395ww(d)(5)(A)(i). Along the same lines, the Secretary would make cost-outlier payments when a hospital's cost adjusted charges surpassed either a fixed multiple of the applicable DRG prospective-payment rate or such other fixed dollar amount that the Secretary established.s 1395ww(d)(5)(A)(ii). In the third clause, Congress provided that outlier payments "shall be determined by the Secretary and shall approximate the marginal cost of care beyond the cutoff point applicable" to the day or cost outlier.s 1395ww(d)(5)(A)(iii).

It is the fourth and final clause, however, that forms the textual nub of the present controversy.s 1395ww(d)(5)(A)(iv). During 1985 and 1986, paragraph (5)(A)(iv) provided:

The total amount of the additional payments made underthis subparagraph for discharges in a fiscal year may notbe less than 5 percent nor more than 6 percent of thetotal payments projected or estimated to be made basedon DRG prospective payment rates for discharges in thatyear.

Id. Traditionally, the Secretary has read paragraph (5)(A)(iv) to mean that at the start of each fiscal year, she must establish the fixed thresholds beyond which hospitals will qualify for outlier payments at levels likely to result in outlier payments totaling between five and six percent of projected DRG payments for that year. In making this estimation, the Secretary first settles on the per-diem outlier payment, which pursuant to § 1395ww(d)(5)(A)(iii), must approximate the marginal cost of care. She then examines historical Medicare-discharge data to determine which thresholds, when multiplied by the per-diem payment rate, would probably yield total outlier payments falling within the fiveto-six-percent range in paragraph (5)(A)(iv). As the Secretary observed during the rulemaking, however, "given the data available, forecasts of probable future outlier payments are inexact." 50 Fed. Reg. 35,646, 35,710 (1985). If it turns out that the Secretary overestimated the mean length of stay for DRGs, the actual total outlier payments at the end of the year may amount to less than five percent of estimated DRGrelated payments. Conversely, underestimating the mean length of stay might produce outlier payments in excess of six percent of estimated total DRG payments.

Whether the Secretary's projections prove to be correct will depend, in large part, on the predictive value of the historical data on which she bases her calculations. For fiscal year 1984, the Secretary relied on data culled from the 1981 Medicare Provider Analysis and Review ("1981 MEDPAR") file, a database containing 1.6 million Medicare discharges from 1981. As a product of the old reasonable-cost system, however, the 1981 MEDPAR file obviously did not reflect one of "[t]he most commonly accepted expectation[s] about the PPS at the time of its inception[:] that it would result in shorter stays for Medicare patients." Office of Research & Demonstrations, Health Care Fin. Admin., U.S. Dep't of Health & Human Servs., Pub. No. 03231, Report to Congress: Impact of the Medicare Hospital Prospective Payment System 6-13 (1984). By 1984, however, preliminary data indicated that the mean length of stay for virtually all DRGs had, as anticipated, declined dramatically under PPS. The Secretary, nevertheless, chose to rely again on the 1981 MEDPAR file in setting outlier thresholds for fiscal years 1985-1986.During those years, though the Secretary set thresholds at a level projected to result in outlier payments at or above paragraph (5)(A)(iv)'s five-percent floor,...

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