Health Alliance Hosps., Inc. v. Burwell

Decision Date16 September 2015
Docket NumberCivil Action No. 13–1775 (CKK), Civil Action No. 14–159 (CKK)
Citation130 F.Supp.3d 277
Parties Health Alliance Hospitals, Inc., Plaintiff v. Sylvia M. Burwell, Secretary of the U.S. Department of Health and Human Services, Defendant
CourtU.S. District Court — District of Columbia

Christopher L. Keough, Akin, Gump, Strauss, Hauer & Feld LLP, Washington, DC, for Plaintiff.

Joshua M. Kolsky, Peter C. Pfaffenroth, U.S. Attorney's Office, Scott Charles Sasjack, U.S. Department of Health and Human Services, Washington, DC, for Defendant.

MEMORANDUM OPINION

COLLEEN KOLLAR–KOTELLY, United States District Judge

Plaintiff Health Alliance Hospitals, Inc. ("Plaintiff" or "the Hospital") filed two lawsuits pursuant to the Administrative Procedures Act ("APA") challenging the Secretary of the Department of Health and Human Services' reduction of the Medicare payments to the Hospital under the Disproportionate Share Hospital ("DSH") program in cost years 2003 (Case No. 14–cv–159), and 2004 and 2006 ( Case No. 13–cv–1775). The amount of payments available to urban hospitals under the DSH program depends, in part, on the number of beds the hospital has available for inpatient care. Plaintiff alleges that the Secretary's deduction of beds licensed for inpatient care, but used for observation services, from Plaintiff's bed count in each of the three cost years was arbitrary, capricious, and otherwise contrary to law. Presently before the Court are Plaintiff's Motion for Summary Judgment and Defendant's Cross–Motion for Summary Judgment. Upon consideration of the pleadings,1 the relevant legal authorities, and the record as a whole, the Court finds that the Secretary's deduction of observation bed days from the available bed days listed to determine the amount of DSH payments for which Plaintiff was eligible for cost year 2003 was arbitrary and capricious. However, the Court finds that the same deduction from Plaintiff's 2004 and 2006 cost years based on the Secretary's amended regulation explicitly requiring the deduction of these bed days was neither arbitrary nor capricious. Accordingly, as to cost year 2003, Plaintiff's Motion for Summary Judgment is GRANTED and Defendant's Cross–Motion for Summary Judgment is DENIED (Case No. 14–cv–159). However, as to cost years 2004 and 2006, Plaintiff's Motion for Summary Judgment is DENIED and Defendant's Cross–Motion for Summary Judgment is GRANTED (Case No. 13–cv–1775).

I. BACKGROUND
A. Statutory and Regulatory Background

Medicare "provides federally funded health insurance for the elderly and disabled," Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1226–27 (D.C.Cir.1994), through a "complex statutory and regulatory regime," Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404, 113 S.Ct. 2151, 124 L.Ed.2d 368 (1993). The program is administered by the Secretary of the Department of Health and Human Services through the Centers for Medicare and Medicaid Services ("CMS"). Cape Cod Hosp. v. Sebelius, 630 F.3d 203, 205 (D.C.Cir.2011). "Part A of the Medicare program provides insurance coverage for inpatient hospital care, home health care, and hospice services." Amgen, Inc. v. Smith, 357 F.3d 103, 105 (D.C.Cir.2004) (citing 42 U.S.C. § 1395c ). "Part B of Medicare is a voluntary program that provides supplemental coverage for other types of care, including outpatient hospital care." Id. (citing 42 U.S.C. §§ 1395j, 1395k ). Observation services are classified as outpatient services and are generally reimbursed under Part B. 59 Fed.Reg. 27,708, 27,930 (May 27, 1994). Observation services involve monitoring, assessment, and treatment of a patient to determine whether the patient should be admitted as an inpatient or discharged from the hospital. Medicare Benefits Policy Manual, Ch. 6, § 20.6 (2003 AR at 396–97). For the cost years at issue in this case, observation services were only compensable under Part A—rather than Part B—for patients subsequently admitted to the hospital in cases where "the outpatient observation care that [the patient] receives is related to the admission such that there is an exact match between the principal diagnosis for both the hospital outpatient claim and the inpatient stay." 74 Fed.Reg. 43,754, 43,905 (August 27, 2009). Otherwise, observational services were only compensable under Part B. See id.

In 1983, with the aim of "stem[ming] the program's escalating costs and perceived inefficiency, Congress fundamentally overhauled the Medicare reimbursement methodology." Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C.Cir.1999) (citing Social Security Amendments of 1983, Pub.L. No. 98–21, § 601, 97 Stat. 65, 149). In the overhaul of Part A, Congress established "a prospective payment system under which hospitals would receive a fixed payment for inpatient services." Cape Cod Hosp., 630 F.3d at 205. Since then, the Prospective Payment System ("PPS"), as the overhauled regime is known, has reimbursed qualifying hospitals for inpatient hospital operating costs at prospectively fixed rates rather than reasonable operating costs or the hospital's actual costs. Cnty. of Los Angeles, 192 F.3d at 1008 ; 42 U.S.C. § 1395ww(d). Congress recognized that the standard payment under the PPS would not account for the additional costs of treating a disproportionate number of low-income patients that some hospitals incur. Cnty. of Los Angeles, 192 F.3d at 1014. Accordingly, Congress authorized an additional payment to "disproportionate share hospitals" ("DSH") located in urban areas that "serv[e] a significantly disproportionate number of low-income patients." 42 U.S.C. § 1395ww(d)(5)(F)(i)(I). Congress linked a hospital's eligibility for a DSH adjustment to three factors: (1) the hospital's location, (2) the number of its beds, and (3) its low-income patient percentage. Id. at § 1395ww(d)(5)(F)(v). For the cost years at issue in this action, hospitals in urban areas were only eligible for a DSH adjustment if they had at least 15% low-income patients.2 Id. at § 1395ww(d)(5)(F)(v)(I). The DSH payment received by an urban hospital is capped at a set percentage of the standard prospective payment rate if the hospital has fewer than 100 beds.3 Id. at §§ 1395ww(d)(5)(F)(iv), (xiii), (xiv). If the hospital has 100 beds or more, there is no cap on the DSH payment. Id. The amount of DSH payment is calculated based on the "disproportionate patient percentage" ("DPP"). Id. at § 1395ww(d)(5)(F)(vii), (xiii). The disproportionate patient percentage "is determined by adding together two fractions."

Allina Health Servs. v. Sebelius, 746 F.3d 1102, 1105 (D.C.Cir.2014) ; see 42 U.S.C. § 1395ww(d)(5)(F)(vi). "The first fraction, referred to as the Medicare fraction, measures the percentage of all Medicare patients (regardless of means) who are low income, i.e., entitled to supplemental security income benefits." Allina Health Servs., 746 F.3d at 1105. "The second fraction accounts for the number of Medicaid patients–who, by definition, are low income—not entitled to Medicare." Id. These calculations are performed using several categories of "patient days." The Medicare fraction is the number of "patient days" for patients who were "entitled to benefits under Part A and were entitled to supplemental security income benefits" divided by the number of "patient days for such fiscal year which were made up of patients who (for such days) were entitled to benefits under Part A." 42 U.S.C. § 1395ww(d)(5)(F)(vi)(I). The Medicaid fraction is the number of "the number of patient days attributable to patients who (for such days) were eligible for Medicaid, but ‘not entitled to benefits under [Medicare] Part A " divided by "the total number of patient days, regardless of whether the patients were enrolled in a federal medical benefits program." Allina Health Servs., 746 F.3d at 1105 (quoting 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II) ).

The statute authorizing additional payments for DSH did not define "beds," so the Secretary had the responsibility of filling this gap. See 42 U.S.C. § 1395ww(d)(5)(F). In 1986, the Secretary adopted the definition of beds from the regulation governing the bed count for the PPS adjustment for teaching hospitals that incur indirect medical education costs (the "IME adjustment"). See 51 Fed.Reg. 16,772, 16,788 (May 6, 1986) (codified at 42 C.F.R. § 412.106(a)(3) (1986) ) (DSH regulation) ("The number of beds in a hospital is determined as specified in § 412.118(b)).4 Specifically, the DSH regulation promulgated in 1986 provided that

the number of beds in a hospital is determined by counting the number of available bed days during the cost reporting period, not including beds assigned to newborns, custodial care, and excluded distinct part hospital units, and dividing that number by the number of days in the cost reporting period.

Id. While the parties disagree as to the proper interpretation of "bed days," the parties agree that the language of the above definition was not changed, in relevant part, until the Secretary promulgated a revised rule that became effective on October 1, 2003. See Pl.'s Mot., at 5 n.1; Def.'s Mot. at 9–15.

In 2003, the Secretary amended the definition of available bed days to expressly exclude the time that hospitals use inpatient beds for observation patients. 68 Fed.Reg. 45,346, 45,41819 (Aug. 1, 2003). The final regulation provided:

For purposes of this section, the number of beds in a hospital is determined by counting the number of available bed days during the cost reporting period and dividing that number by the number of days in the cost reporting period. This count of available bed days excludes bed days associated with ... [b]eds otherwise countable under this section used for outpatient observation services, skilled nursing swing-bed services, or ancillary labor/delivery services.

Id. at 45,470 (emphasis added) (codified at 42 C.F.R. 412.105(b) ). The Secretary characterized the amendment to the bed count regulation as a...

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