Initiatives v. Sebelius

Decision Date13 August 2010
Docket NumberNo. 09-5377.,09-5377.
Citation617 F.3d 490
PartiesCATHOLIC HEALTH INITIATIVES, et al., Appellantsv.Kathleen SEBELIUS, Secretary, United States Department Of Health and Human Services, Appellee.
CourtU.S. Court of Appeals — District of Columbia Circuit

Appeal from the United States District Court for the District of Columbia (No. 1:07-cv-00555-PLF).

Paul D. Clement argued the cause for appellants. With him on the briefs were Christopher L. Keough and J. Harold Richards.

Irene M. Solet, Attorney, U.S. Department of Justice, argued the cause for appellee. With her on the brief was Michael S. Raab, Attorney. Dana L. Kaersvang Attorney, and R. Craig Lawrence, Assistant U.S. Attorney, entered appearances.

Before SENTELLE, Chief Judge, BROWN, Circuit Judge, and RANDOLPH, Senior Circuit Judge.

Opinion for the Court filed by Senior Circuit Judge RANDOLPH.

Opinion concurring in the judgment filed by Circuit Judge BROWN.

RANDOLPH, Senior Circuit Judge:

This is an appeal from an order of the district court granting summary judgment to the Secretary of Health and Human Services. Catholic Health Initiatives, a nonprofit charitable corporation, and a group of its affiliated nonprofit hospitals brought an action under the Medicare Act to recover premiums the hospitals had paid for malpractice, workers' compensation, and other insurance. The hospitals paid the premiums to First Initiatives Insurance Ltd. from 1997 through 2002. Catholic Health wholly owns First Initiatives, which is based in the Cayman Islands.

In general, the Secretary considers malpractice, workers' compensation, and other liability insurance premiums to be part of a hospital's “reasonable costs” incurred in providing services to Medicare beneficiaries. As such, the costs are reimbursable. The Medicare Act defines the “reasonable cost of any services” to be “the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services....” 42 U.S.C. § 1395x(v)(1)(A). The “reasonable cost” “shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs for various types or classes of institutions, agencies, and services....” Id.

The regulations describe reasonable costs as “related to the care of Medicare beneficiaries,” 42 C.F.R. § 413.9(c)(3), and “determined in accordance with regulations,” id. § 413.9(b). Reasonable costs include “all necessary and proper costs incurred in furnishing” Medicare services. Id. § 413.9(a). Necessary and proper costs are those direct and indirect costs “that are appropriate and helpful in developing and maintaining the operation of patient care facilities and activities,” and that are not “substantially out of line with” the costs of similar institutions. Id. § 413.9(b)(2), (c)(2).

The Secretary has issued a Provider Reimbursement Manual. The Manual contains “guidelines and policies to implement Medicare regulations which set forth principles for determining the reasonable cost of provider services,” but it “does not have the effect of regulations.” Centers for Medicare and Medicaid Services, Provider Reimbursement Manual, Part 1, Foreword, at I (“PRM”). The Manual does bind Medicare's “fiscal intermediaries”-private firms under contract with the Secretary to review provider reimbursement claims and determine the amount due. See 42 U.S.C. § 1395h; Yale-New Haven Hosp. v. Leavitt, 470 F.3d 71, 80-81 (2d Cir.2006); St. Mary of Nazareth Hosp. Ctr. v. Schweiker, 718 F.2d 459, 463 (D.C.Cir.1983).1

Rather than purchasing insurance in the market, some Medicare providers have established their own insurance companies-known as “captives”-for the purpose of insuring themselves against malpractice and certain other claims. PRM § 2162.2.A. If the captive is a domestic corporation, and if the premiums it charges are comparable to those of other insurance companies, the Manual states that the affiliated provider is entitled to reimbursement for premiums paid to the captive. Id. But if the captive is offshore, the Manual prohibits reimbursement for premiums if the captive's investments do not comply with the following rule:

In the case of offshore captives, investments by a related captive insurance company are limited to low risk investments in United States dollars such as bonds and notes issued by the United States Government; debt securities issued by United States corporations or governmental entities within the United States rated in the top two classifications by United States recognized securities rating organizations at the time of investment; debt securities of foreign subsidiaries of United States corporations rated in the top two classifications by United States recognized securities rating organizations at the time of investment where the parent United States corporations guaranteed (on the face of the securities) payment of the subsidiaries' securities; and deposits (including Certificates of Deposit) in United States banks or their foreign subsidiaries, and foreign banks rated in the top two short term classifications by United States recognized securities rating organizations. Low risk investments may also include investments of non-United States issuers including foreign governments and corporations and supranational agencies rated in the top two classifications by United States recognized securities rating organizations (effective with investments made on or after 10/11/91). Effective for investments made on or after 10/06/95, the limitation on related offshore captive insurance company investments is extended to include the above described low risk investments rated in the top three classifications by United States recognized securities rating organizations. Additionally, investments may include dividend paying equity securities listed on a United States stock exchange provided that the investment in equity securities does not exceed 10 percent of the company's admitted assets, with the investment in any specific equity issue further limited to 10 percent of the total equity security investment. (All such captives are required to annually submit to a designated intermediary a certified statement from an independent certified public accountant or actuary attesting to compliance or non-compliance with these requirements for the previous period.) These investments cannot be pledged or used as collateral for loans obtained by the captive or parties related to the captive either directly or indirectly, nor may investments be made in a related organization.

PRM § 2162.2.A.4. First Initiatives Insurance did not satisfy these requirements. During the contested period it invested as much as forty to fifty percent of its assets in equity securities.

In light of First Initiatives' noncompliance with the Manual, the hospitals disallowed their premium payments on the annual cost reports they submitted to Medicare's fiscal intermediaries. See 42 C.F.R. § 405.1801(b)(1). The hospitals then sought to recover those premiums by challenging § 2162.2.A.4 at a hearing before the Provider Reimbursement Review Board, a five-member panel with authority to affirm, modify, or reverse an intermediary's decision. 42 U.S.C. § 1395 oo(a), (d), (h). (Here the intermediary decision was merely to accept the hospitals' own disallowance of their premium costs.) The Board must give the Manual “great weight,” but-unlike an intermediary-is not bound by it. 42 C.F.R. § 405.1867.

In a three to two decision, the Board held that the investment limitations in § 2162.2.A.4 of the Manual were a “valid extension” of the statute and the regulations governing “reasonable cost.” Therefore the Board majority treated the provision as “compulsory.” Catholic Health Initiatives v. Mutual of Omaha Ins. Co., PRRB Decision No.2007-D14 (Jan. 24, 2007) (Board Decision). The majority explained that, unlike domestic captive insurance companies, offshore captives present an “inherent risk”: “offshore captives are under the control of foreign governments and are not subject to the same level” of regulation as domestic insurers, which are regulated by the states. In addition, the ten percent limit on equity investments “is in line with the asset allocations found among domestic insurance companies.” The two dissenting Board members believed that § 2162.2.A.4 of the Manual was not an “appropriate application of Medicare statutory reasonable cost principles,” that it was “devoid of any link to the standards expressed in the regulations,” and that it could not be justified as an interpretive rule “exempt from the notice and comment provisions of the Administrative Procedure Act....” The ten percent provision was, the dissenters stated, an example of “why the rulemaking process is critical to establishing standards such as those involved here.”

Catholic Health and the hospitals brought this action in the district court after the Secretary's delegate-the Administrator of the Centers for Medicare and Medicaid Services-declined to review the Board's decision. See 42 U.S.C. § 1395 oo(f); 42 C.F.R. § 405.1877. The district court viewed the issue as “whether the Board's ruling-which found the reimbursement standard expressed in the PRM to be consistent with both the Medicare statute and the Medicare regulations-was lawful, not whether the PRM provision itself was lawful.” Catholic Health Initiatives v. Sebelius, 658 F.Supp.2d 113, 122 (D.D.C.2009). Granting summary judgment in favor of the Secretary, the court found that the Board's adherence to the Manual's interpretation was “not plainly erroneous or inconsistent with the statute or the regulation....” Id. at 123.

The Secretary defends the Manual's investment limitations on the ground that the limitations comprise an “interpretative” rule. See 5 U.S.C. § 553(b)(A); Am. Mining Cong. v. Mine Safety & Health Admin., 995 F.2d 1106 (D.C.Cir.1993). As the...

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