Cumberland Medical Center v. Secretary of Health and Human Services
| Citation | 781 F.2d 536 |
| Decision Date | 15 January 1986 |
| Docket Number | 83-5579,84-1146 and 84-1188,Nos. 83-5546,s. 83-5546 |
| Parties | , Medicare&Medicaid Gu 35,098 CUMBERLAND MEDICAL CENTER; Smith County Memorial Hospital; Maury County Hospital; Middle Tennessee Medical Center; Southern Hills Hospital; Vanderbilt University Hospital; Athens Community Hospital; Bedford County General Hospital; Benton County General Hospital; Bristol Memorial Hospital; Chamberlain Memorial Hospital; Johnson County Memorial Hospital; Kingsport Hospital; McNairy County General Hospital; U.T. Memorial Hospital and Woods Memorial Hospital, Plaintiffs-Appellants (83- 5546/5579), v. SECRETARY OF HEALTH AND HUMAN SERVICES; Carolyne K. Davis, Administrator, Health Care Financing Administration, Defendants-Appellees (83- 5546/5579). CHELSEA COMMUNITY HOSPITAL; Metropolitan Hospital of Detroit; Oakwood Hospital; Sinai Hospital of Detroit; Holy Cross Hospital; Cottage Hospital; Detroit Osteopathic Hospital; Botsford General Hospital; Riverside Osteopathic Hospital; Bi-County Hospital; Mt. Clemens General Hospital; Metropolitan West Hospital; Alpena General Hospital; and Mt. Carmel Mercy Hospital, Plaintiffs-Appellees (84- 1146/1188), v. Margaret M. HECKLER, Secretary of Health and Human Services, and Carolyne K. Davis, Administrator, Health Care Financing Administration, Defendants-Appellants (84- 1146/1188). |
| Court | United States Courts of Appeals. United States Court of Appeals (6th Circuit) |
Robert A. Klein (argued), Weissburg & Aronson, Inc., Los Angeles, Cal., Dale C. Allen, Lockridge & Becker, Knoxville, Tenn., Richard Lee Brown, Tennessee Hosp. Ass'n, Nashville, Tenn., for Cumberland Medical Center, et al.
William G. Christopher, Chris E. Rossman, Margaret A. Shannon, David E. Hinger (argued), Honigman, Miller, Schwartz & Cohn, Detroit, Mich., for Chelsea Community Hosp., et al.
John W. Gill, J. Michael Hayes, U.S. Attys., Knoxville, Tenn., Joe B. Brown, Wendy Hildreth, U.S. Attys., Nashville, Tenn., Joel M. Spere, L. Michael Wicks, U.S. Attys., Detroit, Mich., Jeanne Schulte Scott, Dennis S. Diaz, Dept. of Health & Human Services, Anthony J. Steinmeyer, Katherine S. Gruenheck (argued), Dept. of Justice, Civ. Div., Barbara C. Biddle, Washington, D.C., for Secretary of Health and Human Services, et al.
Before: JONES and CONTIE, Circuit Judges; and JOHNSTONE, District Court Judge. *
The cases consolidated for disposition by this opinion represent some of the last glowing embers of a hotly controversial Medicare regulation whose validity has been all but extinguished by appeals before most of the other federal circuit courts of the nation. The regulation, known as the Malpractice Rule, 42 C.F.R. Sec. 405.452(a)(1)(ii) (1984), has been set aside by all of the courts of appeals that have considered it on the merits. Today we join this overwhelming majority and hold the Malpractice Rule invalid.
The regulation governs the manner in which the Medicare program reimburses hospitals for the cost of malpractice insurance allocable to program beneficiaries. Under prior practice, malpractice insurance costs were included among other general and administrative (G & A) costs, and reimbursement was calculated by multiplying the average per diem cost of all patients in a department by the number of Medicare patient-days served by the department. This utilization reimbursement method had been applied to malpractice insurance costs since the inception of the Medicare program in 1966 until the current regulation took effect on July 1, 1979. The Malpractice Rule was cast as an exception to this general rule, and the latter continued in effect with respect to other costs. Under the new regulation, hospitals are reimbursed in a given year only that percentage of their malpractice premium costs that represents the ratio of malpractice losses paid to Medicare patients to all malpractice losses paid. If a hospital has paid no losses in the reimbursement year, the loss record of the previous four years is used. If no losses have been paid during that period, a national average is employed. The new regulation was prompted by the Secretary's concern that the typically shorter life-expectancy and lower earning capacity of Medicare patients result in fewer and smaller malpractice damage awards per Medicare patient than for non-Medicare patients. Therefore, the Secretary concluded, paying premiums on a per patient basis meant that Medicare was paying more than its share of the costs of malpractice insurance.
The district courts in the Chelsea appeals, Numbers 84-1146 & 1188, held the regulation invalid; it was upheld in Numbers 83-5546 & 5579, the Cumberland cases. The hospitals involved in these appeals, all providers of services to medicare patients, have challenged the Malpractice Rule on three grounds: that the Secretary's promulgation of the rule was arbitrary and capricious in violation of the Administrative Procedure Act, 5 U.S.C. Sec. 706(2)(A) (1982); that the Secretary failed to provide an adequate "basis and purpose" statement in the rule-making procedure as required by 5 U.S.C. Sec. 553(c) (1982); and that the rule improperly allocates the costs of treating Medicare patients to non-Medicare patients or fails to reimburse hospitals for their reasonable costs in violation of 42 U.S.C. Sec. 1395x(v)(1)(A) (1982) of the Medicare Act.
Seven circuits have struck down the Malpractice Rule based on one or more of these grounds. 1 The Secretary conceded at oral argument that the regulation is invalid as promulgated. An analysis of the issues by this court would add little to the extensive law already reported. We hold the Malpractice Rule to be arbitrary and capricious and in violation of the Medicare Act. In doing so, we adopt the reasoning of Judge DeMascio in the Mt. Carmel case, Appeal No. 84-1188, see Mt. Carmel Mercy Hospital v. Heckler, 581 F.Supp. 1311 (E.D.Mich.1983), and rely on the previously cited opinions of the other circuits, particularly that of the Seventh Circuit in St. James Hospital v. Heckler, 760 F.2d 1460 (7th Cir.1985).
The one issue that remains to be resolved is that of appropriate relief. The hospitals contend that reimbursement, retroactive to 1979, should be ordered under the prior utilization method. The Secretary asks that, instead, we remand the cases to her for reconsideration after further rulemaking. The Secretary has published a new proposed rule for the reimbursement of malpractice insurance costs, see 50 Fed.Reg. 25,178 (1985) () (proposed June 17, 1985), which is proposed to take effect retroactively to 1979. Final action on this rule is still pending. For the reasons discussed below, we decline to accede to the Secretary's request.
The five circuit courts that have considered this issue or stated the relief to be granted have ordered reimbursement under the prior regulation. 2 The common rationale is that the current rule being invalid from its inception, the prior regulation is reinstated until validly rescinded or replaced. This case has none of the special circumstances that would justify not returning to the prior regulation. See Motor Vehicles Manufacturer's Association of the United States v. State Farm Mutual Insurance Co., 463 U.S. 29, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983) (); Burlington Northern, Inc. v. United States, 459 U.S. 131, 103...
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