H. Young Medical Center v. Shalala, 99-2035

• Decision Date: 21 March 2000
• Docket Number: No. 99-2035,99-2035
• Citation: 207 F.3d 437
• Parties: (7th Cir. 2000) HOWARD YOUNG MEDICAL CENTER, INCORPORATED, Plaintiff-Appellant, v. Donna E. SHALALA, Secretary of Health and Human Services, Defendant-Appellee
• Court: U.S. Court of Appeals — Seventh Circuit

Page 437

207 F.3d 437 (7th Cir. 2000)

HOWARD YOUNG MEDICAL CENTER, INCORPORATED, Plaintiff-Appellant, v. Donna E. SHALALA, Secretary of Health and Human Services, Defendant-Appellee.

No. 99-2035

In the United States Court of Appeals For the Seventh Circuit

Argued November 2, 1999

Decided March 21, 2000

Appeal from the United States District Court for the Western District of Wisconsin. No. 98 C 520--John C. Shabaz, Chief Judge.

Before COFFEY, FLAUM and KANNE, Circuit Judges.

COFFEY, Circuit Judge.

On July 22, 1998, Howard Young Medical Center, Inc. (Howard Young), a 99- bed hospital located in Woodruff, Wisconsin, appealed the Secretary of Health and Human Services' (Secretary) decision that it was not a sole community hospital.¹ On December 4, 1999, the district court granted summary judgment in favor of the Secretary, concluding that the decision not to grant Howard Young sole community hospital status was supported by the evidence in the case and consistent with the administrative regulations implemented by the Secretary. We affirm.

I. BACKGROUND

A. The Medicare System--Relevant Statutes and Regulations

Under the Medicare system prior to 1983, hospitals and other health care providers were entitled to payment of the lesser of the "reasonable cost" or the "customary charge" for the services they provided. See 42 U.S.C. sec. 1395f(b) (1982). This all changed in 1983 when Congress established a prospective payment system (PPS) for Medicare payment of inpatient hospital services. See 42 U.S.C. sec. 1395ww(d). Under the PPS, Medicare payments are made at predetermined rates for hospital discharges based upon the diagnosis of the patient. See 49 Fed. Reg. 235 (1984). Like all great bureaucracies, this is not the end of the story. There are exceptions to the "diagnosis" based payment scheme; the Secretary is permitted to authorize additional payments to hospitals which are designated as a sole community hospital.

A sole community hospital is defined by Medicare as:

any hospital--

(I) that the Secretary determines is located more than 35 road miles from another hospital,

(II) that, by reason of factors such as the time required for an individual to travel to the nearest alternative source of appropriate inpatient care (in accordance with standards promulgated by the Secretary), location, weather conditions, travel conditions, or absence of other like hospitals (as determined by the Secretary), is the sole source of inpatient hospital services reasonably available to individuals in a geographic area who are entitled to benefits under [Medicare], or

(III) that is designated by the Secretary as an essential access community hospital under [Medicare].

42 U.S.C. sec. 1395ww(d)(5)(D)(iii) (1992). Consistent with the statute, the Secretary promulgated administrative regulations relating to a particular hospital's ability to qualify as a sole community hospital.

The regulations promulgated by the Secretary provide, in relevant part, that to be classified as a sole community hospital, Howard Young must demonstrate that it is located in a rural area, is between 25 to 35 miles from other like hospitals,² and that no more than 25 percent of the patients in the hospital's service area have been admitted to other like hospitals within a 35-mile radius. See 42 C.F.R. sec. 412.92(a)(1). The regulations, therefore, require two separate calculations: 1) Howard Young must establish its "service area;" and 2) the hospital must calculate its "market share" within that service area.

"Service area" is defined as "the area from which a hospital draws at least 75 percent of its inpatients during the most recent 12-month cost reporting period ending before it applies for classification as a sole community hospital." 42 C.F.R. sec. 412.92(c)(3). Furthermore, a "hospital may define its service area as the lowest number of contiguous zip codes from which the hospital draws at least 75 percent of its inpatients." Medicare Provider Reimbursement Manual (PRM) sec. 2810(A)(2)(c).

B. Howard Young's 1992 Application for Sole Community Hospital Status

In 1992, Howard Young filed an application for sole community hospital status, as required, with its fiscal intermediary, Blue Cross and Blue Shield United of Wisconsin (Blue Cross). See 42 C.F.R. sec. 412.92(b)(1)(i). In its application, Howard Young defined its service area by identifying the 16 zip codes most dependent upon the hospital. In identifying the 16 zip codes, Howard Young used those areas with the highest percentage of discharges as opposed to those areas with the highest number of discharges. Based on the information submitted, Blue Cross recommended that the Health Care Financing Administration (HCFA) approve Howard Young's application.

The HCFA disagreed and denied Howard Young's application for sole community hospital status. HCFA did so because Howard Young failed to comply with the "lowest number of zip codes" requirement when it selected zip codes with the highest percentages of discharges instead of the zip codes with the highest numbers of discharges. The HCFA used the information submitted by the hospital and recalculated Howard Young's service area in accordance with the regulations. Because the hospital had 2,253 discharges during the time period under consideration, its service area (in order to meet the required 75%) needed to contain at least 1,690 discharges. See 42 C.F.R. sec.sec. 412.92 (a)(1), (c)(3). The HCFA explained that it recalculated the service area "in the order of discharges from the highest to the lowest, until the service area has included at least 75 percent of [the hospital's] inpatient discharges . . . ." This recalculation resulted in a ten zip code service area as opposed to the 16 zip code area that the hospital proposed. The HCFA then took those ten zip codes and compared Howard Young's market share as compared to "other like hospitals" located in a 35 miles radius. By merely comparing the statistics of the hospitals, HCFA concluded that Howard Young's market share was only 41.4%, well short of the 75% required for sole community hospital status.

C. Proceedings before the Provider Reimbursement Review Board

In accordance with the regulations, Howard Young appealed the HCFA's denial of its application to the Provider Reimbursement Review Board (PRRB). Shortly before the hearing, in September and October of 1995, Howard Young submitted additional discharge data regarding its 1991 fiscal year that it had received from the State of Wisconsin's Office of Health Care Information. According to Howard Young, this new information, which was also submitted to the HCFA, "conclusively established that [it] qualified for sole community hospital status." Basically Howard Young took the ten zip code service area designated by the HCFA and substituted the Boulder Junction, Wisconsin, zip code for the Rhinelander, Wisconsin, zip code despite the fact that Boulder Junction had fewer discharges than Rhinelander.³

The PRRB held an administrative hearing on October 12, 1995, and the only parties allowed to participate, according to the regulations, were the hospital and the intermediary, and neither the Secretary nor the HCFA. See 42 C.F.R. sec. 405.1843. At the hearing, the hospital and the intermediary stipulated that if the new information submitted by the hospital was used, then it would qualify for sole community hospital status.

On March 26, 1998, the PRRB reversed the HCFA and granted Howard Young sole community hospital status effective September 24, 1992. In so doing, the PRRB concluded that it was authorized to consider the new materials submitted by the hospital under 42 U.S.C. sec. 1395oo(d). The PRRB also concluded that the information submitted by Howard Young was relevant to the determination of whether it qualified for sole community hospital status under Medicare. Based on the fact that the hospital and the intermediary stipulated that Howard Young would qualify as a sole community hospital if the information submitted in 1995 was used, the PRRB concluded that Howard Young was "entitled" to sole community hospital status.

D. The Secretary's Decision

The Secretary, acting through her designated agent, the Deputy Administrator of HCFA, reversed the PRRB and concluded that the HCFA had "properly denied [Howard Young's] request for designation as a sole community hospital." The Secretary determined that the regulations and PRM require that Howard Young submit all relevant information with its original application. Based on the original information submitted by the hospital, the Secretary found that the HCFA had properly analyzed the data and denied Howard Young's application because the application did not use the "lowest number of zip codes." The Secretary also concluded that there was no legitimate reason to substitute Boulder Junction for Rhinelander because Boulder Junction had fewer discharges.

The Secretary also determined that the HCFA's denial of Howard Young's application for sole community hospital status could only reasonably be reversed based on the information originally submitted to the HCFA, and not based on the information submitted to the PRRB. In any event, the Secretary concluded that the information Howard Young submitted to the PRRB failed to "demonstrate that HCFA improperly denied [sole community hospital] status," but could only be considered, at most, "a new application for [sole community hospital] status and not a basis for reversing HCFA's original denial." Finally, the Secretary concluded that the PRRB had "incorrectly based its decision on the stipulation," because the HCFA's recalculation of Howard Young's service area "is supported by the record and consistent with the requirements of the regulations and manual instructions."

Howard Young appealed the Secretary's reversal of the PRRB to the district court, which granted summary judgment in favor of the Secretary. Howard Young now appeals to ...