Good Samaritan Hosp. v. Sullivan

CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)
Citation952 F.2d 1017
Docket NumberNos. 90-1641,90-1642,s. 90-1641
Parties, 36 Soc.Sec.Rep.Ser. 33, Medicare & Medicaid Guide P 39,762 GOOD SAMARITAN HOSPITAL, etc., et al., Appellants, v. Louis W. SULLIVAN, etc., Appellees.
Decision Date07 February 1992

Carel T. Hedlund, Baltimore, Md., argued (Laura L. Katz, on the brief), for appellants.

John P. Schnitker, Washington, D.C., argued (Barbara C. Biddle and Ira C. Lupu, Washington, D.C., Gerard Keating and Marcus Christ, Baltimore, Md., on the brief), for appellees.

Before McMILLIAN and FAGG, Circuit Judges, and ARNOLD, * District Judge.

McMILLIAN, Circuit Judge.

Good Samaritan Hospital, Memorial Community Hospital, Memorial Hospital (Seward), Memorial Hospital of Dodge County, St. Mary's Hospital, and Mary Lanning Memorial Hospital (collectively appellants 1 ) appeal from a final order entered in the District Court for the District of Nebraska. Good Samaritan Hospital v. Sullivan, No. CV88-L-523, 1990 WL 42393 (D.Neb. Feb. 16, 1990) (order and memorandum). The Secretary of Health and Human Services (Secretary) cross-appeals from this final order. In the district court, both sides agreed that summary judgment was appropriate because the facts were not in dispute, and the district court granted partial summary judgment in favor of each side. For reversal, appellants argue that (1) the Secretary's refusal to reclassify Memorial Community Hospital as an urban hospital is arbitrary and capricious, (2) the Provider Reimbursement Review Board improperly denied jurisdiction over three cost years, and (3) the district court erred in granting relief that it did. For reversal, the Secretary argues that (1) this court lacks jurisdiction over Mary Lanning Memorial Hospital 2 and (2) the district court erred in allowing appellants a retroactive change in the prescribed methods of Medicare reimbursement. For the reasons discussed below, we affirm in part and reverse in part.

A. Medicare Reimbursement Structure

Under Part A of Medicare, health care providers, in this case hospitals, are reimbursed for providing medical services to Medicare patients. See Title XVIII of the Social Security Act, as amended, 42 U.S.C. § 1395 et seq. (the Medicare Act). Hospitals participate as "providers of services" by entering into an agreement with the Secretary. Id. § 1395x(u). Providers are reimbursed for the lesser of "reasonable costs" or the "customary charges" for services furnished to Medicare beneficiaries. Id. § 1395f(b)(1). "Reasonable cost" is defined as "the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." Id. § 1395x(v)(1)(A). 3 Reasonable cost is determined in accordance with regulations promulgated by the Secretary and these regulations

may provide for determination of the costs of services on a per diem, per unit, per capita, or other basis, may provide for using different methods in different circumstances, may provide for the use of estimates of costs of particular items or services, [and] may provide for the establishment of limits on the direct or indirect overall incurred costs or incurred costs of specific items or services or groups of items or services.

Id. In addition, the Medicare Act requires the Secretary to "provide for the making of suitable retroactive corrective adjustments where, for a provider of services for any fiscal period, the aggregate reimbursement produced by the methods of determining costs proves to be either inadequate or excessive." Id. § 1395x(v)(1)(A)(ii) (clause (ii)).

In 1972, Congress authorized the Secretary to promulgate regulations which establish limits on the costs to be recognized as reasonable. Pub.L. No. 92-603, 86 Stat. 1329 (1972). Pursuant to this statutory authority, the Secretary first promulgated regulations establishing limits on hospital inpatient general routine care in 1974. 20 C.F.R. § 405.460 (1975), redesignated as 42 C.F.R. § 413.30 (1990). These regulations establish specific cost limits based on factors including type of services furnished, geographical location, institutional size, nature and mix of services furnished, and type and mix of patients treated. 42 C.F.R. § 413.30(b) (1990). Providers can request an exemption or exception under specific statutory criteria and procedures. See id. § 413.30(e), (f) (1990). 4 These cost schedules are updated yearly. Initially, these cost schedules categorized hospitals by (1) whether they were located in a Standard Metropolitan Statistical Area (SMSA), (2) the per capita income of the location area and (3) bed size. SMSAs are used to distinguish urban and rural hospitals. Those hospitals located within a SMSA are considered urban and thus receive a higher per capita limit than rural hospitals (those located outside of SMSAs). See 44 Fed.Reg. 31,806 (1979). Changes to SMSA designations, based upon later census data, are applied solely to fiscal years following the effective date of the change.

In 1979, the Secretary promulgated new regulations to change one part of the cost limits. Rather than using area per capita income to adjust for variations in wage levels, a wage index was developed. Id. To determine the wage index, the Bureau of Labor Statistics of the Department of Labor divided the total hospital wages paid in one year by the total number of hospital workers to arrive at an average monthly hospital wage. This data did not take into account the number of full or part-time workers at any given hospital until 1984 when Congress required the Secretary to conduct a study to develop a wage index that would adjust for part-time workers. A new wage index was applied prospectively effective May 1, 1986. Pub.L. No. 99-272, § 9103(a), 100 Stat. 156 (1986).

In order to receive reimbursement, a provider is required to file an annual cost report with a fiscal intermediary (such as Blue Cross). 42 C.F.R. § 413.20 (1990). The fiscal intermediary reviews the cost report, determines the amount of reimbursement due the provider, and issues a "notice of program reimbursement" (NPR). Id. If the provider is dissatisfied with the NPR, the provider can file, within 180 days of receiving the NPR, a request for a hearing before the Provider Reimbursement Review Board (PRRB). 42 U.S.C. § 1395oo(a). A PRRB decision that it lacks the authority to decide a question of law is considered a final agency decision and the provider may, within 60 days, seek judicial review. Id. § 1395oo(f)(1).

B. Facts in the Present Case

Appellants are rural Nebraska hospitals who exceeded the Secretary's promulgated cost limits in the early 1980s and filed appeals to the PRRB challenging the NPRs for the following cost years: Good Samaritan Hospital, 1981, 1982, 1983; Memorial Community Hospital, 1980, 1981, 1982, 1983; Memorial Hospital (Seward), 1980, 1982, 1983; Memorial Hospital of Dodge County, 1981, 1982, 1983, 1984; St. Mary's Hospital, 1980, 1982, 1983; and Mary Lanning Memorial Hospital, 1981, 1982, 1983. Additionally, three hospitals, which were parties to a prior group appeal, neglected to raise any issues concerning certain cost years, and therefore, the PRRB denied jurisdiction over the following cost years: Memorial Hospital (Seward), 1981; Memorial Hospital of Dodge County, 1980; and St. Mary's Hospital, 1981. Appellants challenged the fact that Medicare cost limits (1) did not account for the use of a high percentage of part-time employees, (2) did not permit rural hospitals to show they incurred the same costs as urban hospitals, and (3) were applied in a conclusive rather than a presumptive fashion. Memorial Community Hospital also challenged the denial of its request to be reclassified as an urban hospital.

Appellants claim that the wage-index regulations, by not accounting for part-time workers, disadvantage hospitals which employ a greater percentage of part-time workers than the average hospital. A hospital with a greater percentage of part-time workers will have a lower average monthly hospital wage. Because average monthly hospital wage is one factor used to determine the per diem limit for a given region, hospitals in that area will be disadvantaged. Appellants allege that rural Nebraska hospitals hire a greater percentage of part-time workers than the national average and thus they are disadvantaged by the Secretary's system. A study commissioned by appellants showed that an 11.04 percent adjustment factor applied to the wage index would correct for the failure to account for part-time employees. Following the Secretary's 1984 study of the disparity created by not distinguishing between full and part-time employees, the revised wage index (which went into effect in 1986) increased the rural Nebraska wage index by 11.25 percent. 50 Fed.Reg. 24,403 (1985). Appellants allege that a corrective factor should be applied to the cost years in question to correct for the disadvantage suffered by them prior to 1986.

As to the distinction between rural and urban hospitals, appellants allege that they are located so close to metropolitan areas that their wages were comparable to the wages of urban hospitals. Appellants allege that the classification of urban and rural hospitals is arbitrary and capricious. Appellants argue that they should be allowed to present evidence to show that they pay comparable wages and then should be reclassified as urban hospitals for the years in question.

The PRRB granted appellants' request for expedited judicial review, allowing appellants to take their challenge directly into district court. The district court, on cross-motions for summary judgment, ruled in favor of appellants insofar as it held that the cost limits may be applied only on a presumptive rather than a conclusive basis. The district court found that the Secretary had a...

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