Greenville Hosp. System v. Heckler, Civ. A. No. 6:85-337-3.

• Decision Date: 19 July 1985
• Docket Number: Civ. A. No. 6:85-337-3.
• Citation: 642 F. Supp. 15
• Parties: GREENVILLE HOSPITAL SYSTEM, d/b/a Greenville Hospital Center, and Greenville General Hospital, Plaintiff, v. Margaret M. HECKLER, Secretary of Health and Human Services, Defendant.
• Court: U.S. District Court — District of South Carolina

642 F. Supp. 15

GREENVILLE HOSPITAL SYSTEM, d/b/a Greenville Hospital Center, and Greenville General Hospital, Plaintiff, v. Margaret M. HECKLER, Secretary of Health and Human Services, Defendant.

Civ. A. No. 6:85-337-3.

United States District Court, D. South Carolina, Greenville Division.

July 19, 1985.

James B. Pressly, Jr., Haynsworth, Perry, Bryant, Marion & Johnstone, Greenville, S.C., Leonard C. Homer, Carel T. Hedlund, Ober, Kaler, Grimes, & Shriver, Baltimore, Md., for plaintiff.

James D. McCoy, III, Asst. U.S. Atty., Greenville, S.C., Terry Coleman, Ann T. Hunsaker, Vicki L. Schulkin, Office of General Counsel, Department of Health and Human Services, Washington, D.C., for defendant.

MEMORANDUM OPINION

GEORGE ROSS ANDERSON, Jr., District Judge.

This case involves an appeal under the Medicare statute by Greenville Hospital System on behalf of two of its hospitals, Greenville Hospital Center and Greenville General Hospital (hereinafter "Hospitals"). The Hospitals challenge the refusal of the defendant Secretary of Health and Human Services to adjust the hospital-specific portion of the payment they received for their first year under the new prospective payment system (PPS) enacted by Congress, effective for cost reporting periods beginning on or after October 1, 1983. The Secretary moves to dismiss the appeal on the grounds that the Hospitals have not exhausted their administrative remedies. She claims that the hospitals must wait until they receive a Notice of Program Reimbursement (NPR) following the end of their first PPS year before they can bring their appeal. The Hospitals contend that an NPR is not a requirement for bringing an appeal challenging the amount of payment established before the first PPS year began, and that they have met all of the relevant statutory and administrative prerequisites. The Court agrees with the Hospitals that an NPR is not required for an appeal concerning the predetermined PPS rate, and therefore denies the Secretary's motion to dismiss.

Statutory Background

For cost reporting years commencing before October 1, 1983, Medicare applied its "cost reimbursement system" to reimburse hospitals for inpatient services furnished to Medicare patients. Under this system, Medicare determined the "reasonable costs" of the services that a hospital provided to patients, and then reimbursed the hospitals in that amount or in the amount of the hospital's customary charges, whichever was less. 42 U.S.C. § 1395f(b). At the close of a fiscal year, a hospital would submit a cost report to its "fiscal intermediary." See 42 U.S.C. § 1395h(a). The intermediary would review the cost report and would then issue a "notice of amount of program reimbursement" (NPR). 42 C.F.R. § 405.1803(c) (1982). A hospital that was dissatisfied with an intermediary's NPR could seek a hearing before the Provider Reimbursement Review Board (hereinafter "PRRB" or "Board"). 42 U.S.C. § 1395oo (a)(1)(A) (1982).

Under PPS, hospitals no longer are required to wait until the end of the year to determine their costs and hence their amount of Medicare reimbursement. Rather, they are paid for inpatient operating costs based, generally, on a flat amount for each discharge, depending upon the "diagnosis related group" (DRG) into which the patient's diagnosis and treatment are classified. 42 U.S.C. § 1395ww(d). The amount to be paid for each discharge is set prior to the beginning of the year, so the hospital knows in advance how much it will be paid for each Medicare patient, depending on the DRG. Following a three year transition period, the DRG payment is based upon a predetermined national rate for each discharge, adjusted for the complexity of each hospital's case mix. 42 U.S.C. § 1395ww(d)(1)(A)(iii), (3). However, during the hospital's first three years under PPS, payment for each discharge consists of a blend of the DRG payment and a hospital-specific payment. 42 U.S.C. § 1395ww(d)(1)(A), (C). The hospital-specific payment is derived from the costs a hospital incurred during a prior base year, generally two years before the first PPS year. 42 CFR § 412.71.

Statement of Facts

Greenville Hospital System operates several hospitals, including Greenville Hospital Center ("GHC") and Greenville General Hospital ("GGH"). After the close of the Hospitals' base year and before the first PPS year, the System reallocated beds and services among its hospitals. The result was that GHC nearly doubled its number of beds, significantly increased its services to include intensive care and coronary care units and other services, and became the center of the System's teaching program. GGH reduced its beds from 411 to 30, and lost several departments as well as all of its interns and residents.

As a result of these systemic changes, the base year costs of each hospital had little relationship to the costs the hospitals would actually incur during their transition years, and thus the hospital-specific rate for each hospital, computed from base year costs, was severely distorted. The System informed the intermediary of these changes before the intermediary determined the hospital-specific rate for the hospitals. However, the intermediary calculated hospital-specific rate based on each hospital's base year costs, without consideration of the significant changes that had occurred after the base year.

Following negotiations with the fiscal intermediary and with officials of the Health Care Financing Administration (HCFA), the Administrator of HCFA conceded that a "significant distortion" would exist unless an adjustment was made to the hospital-specific rate, and agreed to an adjustment to the rate of both Hospitals to reflect the changes that had occurred. Exhibit H to Plaintiff's Complaint. However, based upon the regulation at 42 CFR § 412.71(a)(3)(ii)¹, the Administrator applied this revision prospectively only, effective beginning with the second transition year. The Administrator refused to apply the adjustment to the hospitals' first year under PPS because that year had begun before the Administrator made her determination. The Hospitals allege that they lost $1.25 million because of the Secretary's failure to make the adjustment applicable to the first year.

The Hospitals appealed the refusal of the Administrator to apply the revised hospital-specific payment rate to the Hospitals' first transition year to the Provider Reimbursement Review Board. However, because the Board is bound by the above-cited regulation which makes any relief prospective only, the hospitals also sought a determination from the Board that it did not have authority to decide the issue, pursuant to 42 U.S.C. § 1395oo(f)(1). Such an "expedited review" determination allows the hospitals to seek relief directly in federal district court.

The Board ruled that it could not hear the Hospitals' appeal, based on a HCFA Ruling which stated that a provider could not appeal its hospital-specific rate until it received its NPR following the end of the first year under PPS. The Hospitals then appealed the Board's decision that it lacked jurisdiction to this Court.

Jurisdiction and Scope of Review

This Court unquestionably has jurisdiction under 42 U.S.C. § 1395oo to determine whether the Board's decision that it lacked jurisdiction over the Hospitals' appeals was correct. Cleveland Memorial Hospital v. Califano, 594 F.2d 993, (4th Cir.1979); Hopewell Nursing Home, Inc. v. Secretary of HHS, No. 75-1595-0 (D.S.C.1983), 1983 CCH Medicare and Medicaid Guide ¶ 33,023. The scope of my review is to determine whether the Secretary's actions in requiring an NPR for a PPS appeal are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706.

In reviewing the NPR requirement, which was the basis for the Board's denial of jurisdiction, the Court is mindful that ordinarily the Secretary's decisions in administering the Medicare program are entitled to substantial deference. Lexington County Hospital v. Schweiker, 740 F.2d 287 (4th Cir.1984). However, deference cannot sustain an agency's interpretation which is contrary to the language of the statute. In Securities Industry Association v. Board of Governors of the Federal Reserve System, 468 U.S. 137, 104 S.Ct. 2979, 2983, 82 L.Ed.2d 107 (1984), the Supreme Court stated:

Deference is not to be a device that emasculates the significance of judicial review. Judicial deference to an agency's interpretation of a statute "only sets the framework for judicial analysis; it does not displace it." ... A reviewing court "must reject administrative constructions of a statute, whether reached by adjudication or by rulemaking, that are inconsistent with the statutory mandate or that frustrate the policy that Congress sought to implement." (Citations omitted.)

"The judicial deference usually afforded to an agency's determination cannot be allowed to slip into judicial inertia...." Bureau of Alcohol, Tobacco and Firearms v. Federal Labor Relations Authority, 464 U.S. 89, 104 S.Ct. 439, 444, 78 L.Ed.2d 195 (1983).

The NPR Requirement

The NPR requirement is found in Health Care Financing Administration Ruling (HCFAR) 84-1,² and the subsequently amended Medicare regulation at 42 CFR § 412.72(b). HCFAR 84-1 and the regulation (hereinafter the "NPR requirement") state that a determination of the hospital-specific portion of a hospital's prospective payment is not final, and therefore is not reviewable, until after an intermediary has issued an NPR following the close of a provider's first PPS year.

The hospital-specific portion is determined prior to the start of the first PPS year and governs 75% of the hospital's payment for each discharge during that year. 42 U.S.C. § 1395ww(d)(1)(C)(i). However under the NPR requirement, a hospital must wait two to three years after the rate is determined until it receives its NPR and is permitted to challenge that rate.³

This is not the first c...