Kaiser Found. Hosps. v. Sebelius

• Citation: 708 F.3d 226
• Decision Date: 05 March 2013
• Docket Number: No. 12–5037.,12–5037.
• Parties: KAISER FOUNDATION HOSPITALS, doing business as Kaiser Foundation Hospital–Anaheim, doing business as Kaiser Foundation Hospital–Bellflower, doing business as Kaiser Foundation Hospital–Fontana, doing business as Kaiser Foundation Hospital–Harbor City, doing business as Kaiser Foundation Hospital–Panorama City, doing business as Kaiser Foundation Hospital–Riverside, doing business as Kaiser Foundation Hospital–San Diego, doing business as Kaiser Foundation Hospital–Sunset, doing business as Kaiser Foundation Hospital–West Los Angeles, doing business as Kaiser Foundation Hospital–Woodland Hills, Appellee v. Kathleen SEBELIUS, Secretary of the United States Department of Health and Human Services, Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

708 F.3d 226

KAISER FOUNDATION HOSPITALS, doing business as Kaiser Foundation Hospital–Anaheim, doing business as Kaiser Foundation Hospital–Bellflower, doing business as Kaiser Foundation Hospital–Fontana, doing business as Kaiser Foundation Hospital–Harbor City, doing business as Kaiser Foundation Hospital–Panorama City, doing business as Kaiser Foundation Hospital–Riverside, doing business as Kaiser Foundation Hospital–San Diego, doing business as Kaiser Foundation Hospital–Sunset, doing business as Kaiser Foundation Hospital–West Los Angeles, doing business as Kaiser Foundation Hospital–Woodland Hills, Appellee

v.Kathleen SEBELIUS, Secretary of the United States Department of Health and Human Services, Appellant.

No. 12–5037.

United States Court of Appeals,District of Columbia Circuit.

Argued Nov. 7, 2012.

Decided March 5, 2013.

Appeal from the United States District Court for the District of Columbia (No. 1:11–cv–00092).

Howard S. Scher, Attorney, U.S. Department of Justice, argued the cause for appellant. With him on the briefs were Stuart F. Delery, Acting Assistant Attorney General, Ronald C. Machen Jr., U.S. Attorney, and Michael S. Raab, Attorney. R. Craig Lawrence, Assistant U.S. Attorney, entered an appearance.

Jordan B. Keville argued the cause for appellee. With him on the brief was Jonathan P. Neustadter. Harry R. Silver entered an appearance.

Before: ROGERS, BROWN and KAVANAUGH, Circuit Judges.

Opinion for the Court filed by Circuit Judge BROWN.

BROWN, Circuit Judge:

The Kaiser plaintiffs (“Kaiser”) are a consortium of ten teaching hospitals located in Southern California that receive Medicare payments to offset the costs associated with training “full-time equivalent” residents and intern physicians (“FTEs”). In 1997, Congress capped those payments in such a way that the number of FTEs the hospitals trained in 1996 would dictate the maximum reimbursement in all future years. Although Kaiser and the Health and Human Services Secretary (“Secretary”) agree the 1996 data is not accurate, the Secretary believes this predicate fact cannot be corrected outside the three-year reopening window, 42 C.F.R. § 405.1885.¹ Concluding otherwise, the District Court granted Kaiser's motion for summary judgment and remanded to the agency. Kaiser Found. Hosps. v. Sebelius, 828 F.Supp.2d 193, 204 (D.D.C.2011). Unpersuaded by the Secretary's narrow, arbitrarily applied interpretation, we affirm.

I

A

As the District Court explained:

The Medicare program, established under Title XVIII of the Social Security Act and administered through CMS, provides federally funded health insurance to eligible aged or disabled persons. See generally42 U.S.C. § 1395 et seq. Under the program, the Department of Health and Human Services “reimburses medical providers for services they supply to eligible patients.” Northeast Hosp. Corp. v. Sebelius, 657 F.3d 1, 2 (D.C.Cir.2011); see generally42 U.S.C. § 1395 et seq. In order to be reimbursed, hospitals must submit an annual cost report detailing the expenses they incurred during the past fiscal year. See42 C.F.R. §§ 413.20, 413.24. The Secretary has contracted with fiscal intermediaries to audit cost reports, determine how much Medicare owes each provider, and issue interim payments. See42 U.S.C. § 1395h; 42 C.F.R. § 405.1803.

Among other things, Medicare reimburses approved teaching hospitals for the direct costs of graduate medical education (GME)— e.g., salaries and benefits for residents and interns. See42 C.F.R. § 413.75. The amount of GME reimbursement is based in part on the number of FTEs in the hospital's training program. See42 U.S.C. § 1395ww(d)(5)(B)(ii); 42 C.F.R. § 413.79(d). In 1997, Congress imposed a cap on the number of FTEs a hospital may include for purposes of calculating future GME payment, which is known as the “GME FTE cap.” See42 U.S.C. [§ ] 1395ww(h)(4)(F); 42 C.F.R. § 413.79(c)(2)(i). Specifically, for cost-report periods beginning on or after October 1, 1997, the hospital's unweighted FTE count—meaning the actual number of FTEs before applying statutorily specified weighting factors—“may not exceed the number ... of such full-time equivalent residents for the hospital's most recent cost reporting period ending on or before December 31, 1996.” 42 U.S.C. [§ ] 1395ww(h)(4)(F). In other words, the FTE count a hospital included in its latest pre–1997 report would determine its cap (and thereby affect its reimbursement) for the indefinite future.

Hospitals' pre–1997 reports included only a weighted FTE count. See62 Fed.Reg. 46,004(V)(I)(2)(a). Because the FTE cap is calculated based on the unweighted count, and additional data needed to be collected to calculate that figure, the caps were not established until the providers' first cost report for the period beginning on or after October 1, 1997—which for [Kaiser] was filed in 1998. Id. at 46,004, 46,005;see also42 C.F.R. § 413.79. “FTE count,” therefore, refers to the weighted figure provided in the hospitals' pre–1997 cost reports, and “FTE cap” refers to the cap established thereafter based on the unweighted FTE count.

Once the GME FTE cap is established, the intermediary takes it into account when reviewing a hospital's cost reports. See42 C.F.R. § 413.79. After such review, the intermediary issues a “notice of program reimbursement” (NPR) indicating how much Medicare owes the hospital for the fiscal year covered by the report. See42 C.F.R. § 405.1803. The hospital has 180 days from receipt of the NPR to request a review by the Provider Reimbursement Review Board (PRRB). See42 U.S.C. § 1395 oo (a). If the hospital does not timely appeal the NPR, the cost report is considered final. See42 C.F.R. § 405.1807(c).

The reimbursement determination may nevertheless be reopened—upon a provider's request or at the intermediary's own initiative—within three years of the date of the NPR.... Once three years has passed, the intermediary's determination is deemed “closed” and can no longer be reopened.

Kaiser, 828 F.Supp.2d at 195–96.

B

Before this litigation began, a separate group of Northern California-based Kaiser hospitals complained clinic-based residents were mistakenly excluded from their “Indirect Medical Education” (“IME”) resident FTE count. The PRRB agreed these residents should be included, see Kaiser Found. Grp. v. Aetna Life Ins. Co., PRRB Dec. No. 96–D50 (Aug. 14, 1996), and the CMS affirmed, see Kaiser Found. Grp. v. Aetna Life Ins. Co.,

HCFA Administrator Decision (Oct. 21, 1996) reprinted in [1996–2 Transfer Binder] Medicare & Medicaid Guide (CCH) ¶ 44,980. Following suit, the present Kaiser plaintiffs requested a similar adjustment in their own IME resident FTE count but “did not request a similar adjustment for GME purposes in their 1996 cost reports.” Appellant Br. at 14.

This oversight would haunt Kaiser. For years, Kaiser's intermediary used the inaccurate resident FTE count from the 1996 cost report coupled with additional data from the 1998 cost report—the “predicate facts”—to generate artificially low GME FTE caps.² Kaiser only challenged the errant data in its appeal of the intermediary's handling of the 1999–2003 cost reporting years. By then, however, the 1996 and 1998 cost reporting years were “closed.” They had fallen outside of the three-year reopening window.

Accepting as much, Kaiser forswears any direct challenge to the 1996 and 1998 cost reports. Although the intermediary would have to adjust the total reimbursement for the open cost reporting years 1999–2003 using the corrected GME FTE cap, nothing, Kaiser maintains, would necessitate an adjustment to the total reimbursement from either closed reporting period. In other words, Kasier does not believe its challenge would have improper retroactive effect because the intermediary would not have to reopen any closed cost report. See Appellee Br. at 11.

The intermediary was unconvinced. Any modification of the data underlying the 1996/1998 GME FTE cap, it reasoned, would constitute a reopening of closed years even if it did not affect Kaiser's final reimbursement determination. See Kaiser, 828 F.Supp.2d at 197. The PRRB agreed with Kaiser's position. See Kaiser Found. Hosps. v. Palmetto GBA/First Coast Serv. Options, PRRB Dec. No. 2011–D1 (Oct. 1, 2010). But the CMS Administrator, after sua sponte review, did not. See Kaiser Found. Hosps. v. Palmetto GBA/First Coast Serv. Options, HCFA Administrator Decision (Nov. 30, 2010). Because the Administrator's reversal constituted the final decision of the Secretary, see42 U.S.C. § 1395 oo (f), Kaiser renewed its challenge in the District Court.

Finding in Kaiser's favor, the District Court granted Kaiser's motion for summary judgment and remanded the matter to the agency. See Kaiser, 828 F.Supp.2d at 204. Assuming arguendo that the FTE cap was tied to a specific cost report, the court concluded modifying FTE counts in closed years did not constitute a “reopening.” The Secretary's interpretation ran afoul of the plain language of the reopening regulation, id. at 199–200, and, among other shortcomings, contravened recent cases in which the Secretary took contrary positions, id. at 200–02. The Secretary appealed.

On appeal, the agency advances two sets of arguments. First, changes to predicate facts in closed years constitute an impermissible reopening under § 405.1885. Second, and in the alternative, even if the modification of predicate facts in a closed year does not itself amount to a reopening, the change will necessitate an adjustment of that year's reimbursement, which all parties agree constitutes an impermissible reopening. We consider each argument in turn.³

II

A

In relevant part, the Secretary's reopening regulation provides:

A determination of an intermediary ... may be reopened with respect to findings on matters at issue in such determination.... Any such request to reopen must be made within 3 years of the date of the notice of the intermediary ... decision....

42 C.F.R. §...