Menorah Medical Center v. Heckler, 84-2257
| Decision Date | 24 July 1985 |
| Docket Number | No. 84-2257,84-2257 |
| Citation | 768 F.2d 292 |
| Parties | , Medicare&Medicaid Gu 34,821 MENORAH MEDICAL CENTER, Freeman Hospital, McCune Brooks Hospital, Memorial Community Hospital, Gentry County Memorial Hospital, Springfield General Osteopathic Hospital, Johnson County Hospital, Skaggs Community Hospital, St. John's Medical & H.H.A., Lakeside Hospital, St. Francis Hospital, Research Medical Center, Trinity Lutheran Hospital, Bates County Memorial Hospital, Lester E. Cox Medical Center, Hedrick Medical Center, Beech Medical Center, Nevada City Hospital & H.H.A., Fairfax Community Hospital, Boone Hospital Center, Barton County Memorial Hospital, West Plains Memorial Hospital, St. Joseph Hospital (St. Joseph, Mo.), Independence San. & Hospital, North Kansas City Memorial Hospital, Truman Medical Center, East Baptist Memorial Hospital, Noll Memorial Hospital, South Barry County Memorial Hospital, Callaway Memorial Hospital, St. Luke's Hospital of Kansas City, Sullivan County Memorial Hospital, Sac-Osage Hospital, Medical Center of Independence, Golden Valley Memorial Hospital, Liberty Hospital, Appellees, v. Margaret HECKLER, Secretary of Health and Human Services, Appellant. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Barbara C. Biddle, Dept. of Justice, Washington, D.C., for appellant.
Myra C. Selby and Geoffrey Segar, Indianapolis, Ind., for appellees.
Before ARNOLD and FAGG, Circuit Judges, and HARPER, * Senior District Judge.
In 1979 the Secretary of Health, Education, and Welfare 1 issued a new regulation for reimbursing Medicare health providers for the portion of malpractice insurance premiums which is attributable to Medicare patients (codified at 42 C.F.R. Sec. 405.452(b)(1)(ii)(1982)). This regulation, commonly referred to as the Malpractice Rule, reimburses malpractice premiums based on the ratio of Medicare malpractice claims paid to total malpractice claims paid during the year for which reimbursement is sought and the preceding four years. The District Court 2 concluded that the Malpractice Rule is invalid because it fails to give the Medicare provider reasonable reimbursement for the premium costs incurred by Medicare patients, contrary to the Medicare Act, 42 U.S.C. Sec. 1395 et seq. (1982), because it is arbitrary and capricious, see 5 U.S.C. Sec. 706 (1982), and because the Secretary failed to supply an adequate basis-and-purpose statement for the rule as required by 5 U.S.C. Sec. 553(c)(1982). 3 We affirm.
On March 15, 1979, the Secretary published a notice of proposed rulemaking that expressed her desire to promulgate a new rule for reimbursing malpractice premiums. This rule was intended to prevent Medicare from reimbursing a "disproportionate" share of the premiums. 44 Fed.Reg. 15,744 (1979) () (proposed March 5, 1979). Under the regulation then in effect, Medicare reimbursed a hospital for malpractice premiums in proportion to the utilization that Medicare patients made of its services during the year in question. Malpractice premiums were pooled together with other general and administrative (G & A) costs, and then reimbursed according to the ratio of Medicare patient utilization. Thus, if Medicare patients accounted for 30% of the patient-days at a hospital for a given year, Medicare would reimburse the hospital for 30% of G & A costs, including malpractice premiums. This method assumed that costs for which Medicare patients incur a disproportionate share, such as the costs of processing Medicare paperwork, would be balanced out by costs for which non-Medicare patients incur a disproportionate share, such as the G & A costs associated with younger patients.
The Secretary proposed the new regulation because she believed that the existing "method result[ed] in Medicare paying a disproportionate amount of malpractice costs." 44 Fed.Reg. 15,745 (1979). She based this belief on the following observations:
A study conducted by an HEW consultant 4 indicates that malpractice awards for Medicare and Medicaid patients are significantly lower in amount than losses for other patient population. The lower awards for these patients result because their income potential and life expectancy are less than the remainder of the patient population. Thus, the use of overall Medicare utilization to allocate malpractice costs results in Medicare paying for a disproportionate amount of malpractice costs.
The proposed rule removed malpractice insurance premiums from the G & A pool and placed them in a separate fund where they would be reimbursed using a new ratio instead of the utilization ratio. The new ratio is determined by dividing the malpractice losses paid to Medicare patients by the total malpractice losses paid to all patients over the current year and the preceding four years. 44 Fed.Reg. 15,745 (1979). If a hospital did not have malpractice losses over the five-year period, its reimbursement ratio was to be determined using an actuarial estimate of Medicare's share of the malpractice costs of that particular hospital.
The Secretary received nearly 600 comments on the proposed rule from health-care institutions, consumers, accounting firms, insurance companies, actuaries, health-care consultants, physicians and nurses, and Medicare beneficiaries. All of the comments opposed the rule. The Secretary nevertheless issued the final Malpractice Rule, which differs from the proposed rule only in its treatment of providers with no malpractice losses during the five-year period. Instead of compensating these providers using a ratio arrived at through an actuarial estimate, the final rule compensates them using the national ratio of malpractice awards paid to Medicare patients to malpractice awards paid to all patients. 5
The plaintiffs make three separate challenges to the Malpractice Rule. They argue that the Malpractice Rule is arbitrary and capricious in violation of the Administrative Procedure Act (APA), 5 U.S.C. Sec. 706(2)(A) (1982); that the rule fails to contain an adequate basis-and-purpose statement as required by 5 U.S.C. Sec. 553(c)(1982); and that the Rule violates the Medicare Act, 42 U.S.C. Sec. 1395f(b)(1)(1982), in that it fails to reimburse providers for the "reasonable cost" of their services.
These three issues have been thoroughly canvassed by the Seventh Circuit in St. James Hospital v. Heckler, 760 F.2d 1460 (1985); see also Walter O. Boswell Memorial Hospital v. Heckler, 749 F.2d 788 (D.C.Cir.1984). In St. James, the Seventh Circuit concluded that the Malpractice Rule was arbitrary and capricious because the Secretary based the rule on a faulty study and failed to consider critical aspects of the problem. 760 F.2d at 1465-69. It likewise found the basis-and-purpose statement inadequate because the Secretary failed to address significant criticisms made of the Rule. Id. at 1469-70. Finally, it held that the Rule violated the Medicare Act because the Secretary failed to show that the G & A pool had, before the Rule was adopted, impermissibly shifted costs to the Medicare program, and because the Rule fails to reimburse providers adequately for the actual costs of obtaining malpractice insurance for Medicare patients. Id. at 1471-72. We find the reasoning of the Seventh Circuit persuasive and see no need to add extensive discussion of our own. We make the following brief additional comments.
Under 5 U.S.C. Sec. 706, we are required to reject an agency rule which is arbitrary and capricious. The Supreme Court has recently reiterated the standards for this evaluation. Motor Vehicle Manufacturers Association of the United States, Inc. v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983). A rule is arbitrary and capricious if "the agency [fails to] articulate a satisfactory explanation for its action, including a 'rational connection between the facts found and the choice made.' " Id. 103 S.Ct. at 2866-67, quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 246, 9 L.Ed.2d 207 (1962). "Normally, an agency rule would be arbitrary and capricious if the agency ... entirely failed to consider an important aspect of the problem, [or] offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise." 103 S.Ct. at 2867.
The Secretary did not offer a plausible explanation for the Malpractice Rule or consider several important aspects of the problem it was intended to address. Indeed, the Secretary failed to substantiate her conclusion that a problem ever existed, namely, that Medicare was paying a disproportionate amount of G & A costs. She arrived at this conclusion through several leaps in reasoning. She began with the premise, derived from the Westat Study, that "malpractice awards for Medicare ... patients are significantly lower in amount than losses for other patient population." 15 Fed.Reg. 15,745 (1979). From this she concluded that "Medicare pay[s] a disproportionate amount of malpractice [premium] costs." Id. And from this and the observation that malpractice costs are a significant part of the G & A pool, she finally concluded that Medicare was paying more than its share of the G & A pool. This logic crumbles upon analysis.
The Secretary's initial premise, that Medicare patients on average receive significantly lower malpractice awards than non-Medicare patients, came from the Westat Study. This study, however, came under significant criticism regarding the adequacy of its data base to generalize to national totals and the accuracy of the statistics relied on. 6 Since these criticisms cast serious doubt on the premise grounding the Secretary's explanation, her failure to respond to them was arbitrary and...
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