Harvard Pilgrim Health Care v. Thompson

• Decision Date: 26 May 2004
• Docket Number: C.A. No. 02-354L.
• Citation: 318 F.Supp.2d 1
• Court: U.S. District Court — District of Rhode Island
• Parties: HARVARD PILGRIM HEALTH CARE OF NEW ENGLAND, Plaintiff v. Tommy G. THOMPSON, in his Capacity as Secretary of the United States Department of Health and Human Services; and Dr. Mark McClellan, in his Capacity as Administrator of the Centers for Medicare & Medicaid Services, Defendants.

Page 1

318 F.Supp.2d 1

HARVARD PILGRIM HEALTH CARE OF NEW ENGLAND, Plaintiff v. Tommy G. THOMPSON, in his Capacity as Secretary of the United States Department of Health and Human Services; and Dr. Mark McClellan, in his Capacity as Administrator of the Centers for Medicare & Medicaid Services, Defendants.

C.A. No. 02-354L.

United States District Court, D. Rhode Island.

May 26, 2004.

Normand G. Benoit, Kimberly I. McCarthy, Robert K. Taylor, Partridge, Snow & Hahn LLP, Providence, RI, for Plaintiff.

Jonathan C. Brumer, U.S. Department of Health and Human Services, Office of the General Counsel, Baltimore, MD, Anthony C. DiGioia, U.S. Attorney's Office, Providence, RI, for Defendant.

DECISION AND ORDER

LAGUEUX, Senior District Judge.

This matter is before the Court on an appeal filed by Plaintiff, Harvard Pilgrim Health Care of New England ("Harvard Pilgrim"), to a Memorandum and Order issued by Magistrate Judge Robert W. Lovegreen. Judge Lovegreen granted the motion of Defendants, Tommy G. Thompson and Thomas A. Scully ¹, ("Defendants") for a Protective Order from certain discovery requested by Harvard Pilgrim. Mem. & Order, at 5. He concluded that no discovery was necessary as to Harvard Pilgrim's due process claim because the agency record was complete regarding Defendants' rationale for determining that Harvard Pilgrim's notice of a change in its cost apportionment method was deficient. Id. Judge Lovegreen also concluded that discovery was unwarranted as to Harvard Pilgrim's equal protection claim because that claim was not raised during the administrative hearings and consequently, was deemed to have been waived by Harvard Pilgrim. Id. Harvard Pilgrim requests that this Court modify or set aside Judge Lovegreen's Memorandum and Order arguing that it was not required to present its constitutional claims to the agency as the claims were beyond the agency's expertise and thus, Harvard Pilgrim did not waive those claims and is entitled to discovery thereof.

For the reasons that follow, this Court affirms Judge Lovegreen's conclusions that no discovery is necessary regarding Harvard Pilgrim's due process and equal protection claims and that Defendants' Motion for a Protective Order should be granted. However, this Court also concludes that Harvard Pilgrim's failure to present its equal protection claim during the administrative proceedings did not result in a waiver of that cause of action. If Harvard Pilgrim wishes to pursue the equal protection claim in this Court, it must first present that claim to the administrative agency so that the parties and the agency can develop a record for this Court to utilize in determining whether or not Defendants' decision was arbitrary and capricious and/or constituted a violation of Harvard Pilgrim's constitutional right to equal protection.

I. Background and Procedural History

Harvard Pilgrim Health Care of New England is a health maintenance organization ("HMO") incorporated under the laws of Rhode Island. Am. Compl. for Declaratory & Injunctive Relief, at para. 1 (hereinafter, Am.Compl.). Defendant, Tommy G. Thompson, is the Secretary of the United States Department of Health and Human Services ("the Secretary"). Dr. Mark McClellan, also a named Defendant, is the Administrator of the Centers for Medicare and Medicaid Services ("CMS") ², an agency of the United States, which is under the Secretary's authority.

Obtaining Federal Reimbursement for Services Provided to Medicare Recipients

Harvard Pilgrim provided services to Rhode Island Medicare recipients throughout the 1980s and 1990s. In order to obtain federal reimbursement for those services, Harvard Pilgrim was required to submit cost reports to the Health Care Finance Administration ("HCFA"), now known as CMS. Each cost report reflected Harvard Pilgrim's apportionment of costs attributable to its Medicare patients based on a cost apportionment system accepted by the agency, CMS, in accordance with its regulations.

According to the federal laws and regulations governing Medicare, an HMO's cost reimbursement is based on a ratio between the covered Medicare Part B services provided and the total services provided. This ratio may be expressed by any of three cost apportionment methods 1)Medicare encounters to total encounters; 2)Medicare charges to total charges; or 3)Medicare relative value units ("RVUs") to total RVUs. During the 1980s and early 1990s, Harvard Pilgrim used the first cost apportionment method: Medicare encounters to total encounters.

In the early 1990s, the auditor assigned to Harvard Pilgrim's cost reports recommended that Harvard Pilgrim change to the RVU system used by other HMOs. HCFA published and devised the RVU system and had approved of its use by several large Medicare service providers.

Harvard Pilgrim Decides to Use the RVU Cost Apportionment Method

On or about September 30, 1991, Harvard Pilgrim sent a written notice to CMS' predecessor, HCFA, that it intended to begin using the RVU system as its cost apportionment method. Harvard Pilgrim sent a second written notification on December 31, 1991. On November 1, 1993, and after adjusting its data collection systems to utilize the new RVU method, Harvard Pilgrim sent a third notice to HCFA stating that it intended to switch to the RVU cost apportionment method beginning in 1994.

At the time that Harvard Pilgrim sent these notices, HCFA had no written policies or procedures for an HMO to follow when changing its cost apportionment method. Harvard Pilgrim avers that HCFA had an informal policy during the 1990s of responding to letters stating intentions to change cost apportionment methods by approving the change or requesting additional information. However, HCFA did not respond to any of the notices submitted by Harvard Pilgrim and did not request any additional information.

Harvard Pilgrim Begins Using the RVU Method

Harvard Pilgrim started using the RVU cost apportionment method for cost years beginning in 1994. On February 25, 1998, in anticipation of the agency's audit of its cost reports and determination of the reimbursement due for 1994 through 1996, Harvard Pilgrim submitted an amended cost report to HCFA using the RVU cost apportionment method. In February of 1999, Harvard Pilgrim provided HCFA with its RVU studies. HCFA accepted these studies and approved Harvard Pilgrim's change to the RVU cost apportionment method for cost years beginning with 1999, but refused to accept Harvard Pilgrim's use of the RVU method for any earlier years.

The Agency Disallows Certain Costs Reflected by the RVU Method

In January of 2000, HCFA completed its audit of cost years 1994 through 1996 and issued its Notices of Program Reimbursement ("NPR"). In each NPR, HCFA adjusted the items for which Harvard Pilgrim had used RVUs as its cost apportionment method because Harvard Pilgrim had not obtained HCFA's approval before changing to the RVU method. This adjustment resulted in $2,429,602.00 in disallowed costs.

Harvard Pilgrim then challenged the agency's decision in administrative proceedings. The key issue presented at the administrative level was whether Harvard Pilgrim had given adequate notice, under the Medicare regulations, that it was changing to the RVU method. An agency intermediary interpreted the regulations and Manual, concluded that the notice was inadequate, and ruled in CMS' favor on November 8, 2001. The agency conceded that its practice during 1994, in most cases, was to respond to inadequate notices by requesting additional information. However, the agency had not followed this practice with respect to Harvard Pilgrim's notice.

The Agency Issues a Final Determination and Harvard Pilgrim Brings the Matter to this Court

Harvard Pilgrim appealed the intermediary's decision. On July 8, 2002, the Deputy Administrator of CMS, acting on the Secretary's behalf, affirmed the intermediary's recommendations, which constituted the Secretary's final administrative determination of the matter. On August 7, 2002, Harvard Pilgrim initiated the instant action by filing a Complaint with this Court. Harvard Pilgrim amended that Complaint about a week later.

The Amended Complaint alleges federal court jurisdiction pursuant to 28 U.S.C. § 1331 and the Administrative Procedure Act, 5 U.S.C. §§ 701-706 (1976)(hereinafter, "APA"), and contains two counts. In Count I, Harvard Pilgrim seeks review under the APA and argues that the agency's determination that Harvard Pilgrim was required to obtain prior approval of its change to the RVU method was arbitrary, capricious, and contrary to law. Am. Compl., at para. 14. Count II is grounded in the Due Process and Equal Protection clauses to the United States Constitution. Id. at paras. 15, 16. The due process claim is based on CMS' alleged: 1)retroactive application of requirements for changing cost apportionment methods that were contrary to CMS' informal policies and not described in any statute, regulation, manual, program instruction, or other written guidelines; 2)lack of applicable procedures to alert Harvard Pilgrim, in a timely manner, that its notice was deficient and that the change in methodology would not be approved; and 3)failure to provide any opportunity, within a reasonable period after Harvard Pilgrim submitted its notice, to challenge the agency's determination or provide supplemental information to address any deficiencies. Mem. & Order, at 2. Harvard Pilgrim's equal protection claim is based on CMS' alleged actions of following an informal policy of either approving changes in cost apportionment methods or requesting additional information with regard to other similarly situated HMOs, but not with regard to Harvard Pilgrim. Id.

Harvard Pilgrim Seeks the Discovery at Issue in the Present Appeal

Defendants answered the Amended Complaint and Harvard Pilgrim then sought discovery related to its constitutional claims. This discovery includes a total of nineteen...