Mt. Carmel Mercy Hospital v. Heckler

• Decision Date: 30 November 1983
• Docket Number: Civ. No. 82-74193.
• Citation: 581 F. Supp. 1311
• Parties: MT. CARMEL MERCY HOSPITAL, Plaintiff, v. Margaret M. HECKLER, et al., Defendants.
• Court: U.S. District Court — Western District of Michigan

581 F. Supp. 1311

MT. CARMEL MERCY HOSPITAL, Plaintiff, v. Margaret M. HECKLER, et al., Defendants.

Civ. No. 82-74193.

United States District Court, E.D. Michigan, S.D.

November 30, 1983.

Robert A. Klein, Los Angeles, William G. Christopher, Detroit, Mich., for plaintiff.

Jeanne Schulte Scott, Dept. of Health & Human Services, Washington, D.C., L. Michael Wicks, Asst. U.S. Atty., Detroit, Mich., for defendants.

MEMORANDUM OPINION

DeMASCIO, District Judge.

Plaintiff, Mt. Carmel Mercy Hospital, a provider of Medicare services, filed this complaint to challenge the validity of the new malpractice rule. Under the new rule, reimbursement for malpractice insurance costs is based on the "dollar ratio of the provider's Medicare paid malpractice losses for the cost reporting period at issue and the preceding 4-year period." 42 C.F.R. § 405.452(b)(1)(ii). Prior to the enactment of this rule, plaintiff was reimbursed for its malpractice insurance costs based on its Medicare utilization rate of approximately 36.2%. After the passage of the new rule, the Secretary only reimbursed plaintiff for 8.1% of its insurance costs. The parties have filed cross motions for summary judgment. After a careful examination of the able briefs filed by the parties and argument, we conclude that the new malpractice rule is invalid because it is arbitrary, capricious and in excess of the Secretary's statutory authority. We do find, however, that the Secretary did comply with the notice and comment procedures of the Administrative Procedure Act.

On October 28, 1981, Blue Cross/Blue Shield, plaintiff's intermediary, applied the malpractice regulations that are being challenged in this cause, and the result was a substantial shortfall in plaintiff's expected reimbursement for medical malpractice insurance. Plaintiff challenged the intermediary's application of this rule before the Provider Reimbursement Review Board (PRRB). Plaintiff does not question the computations of the intermediary, rather it contends that the malpractice rule is legally invalid. Based on a 1980 amendment which provided for a bypassing of PRRB review and direct judicial review, the PRRB determined that expedited judicial review was proper. 42 U.S.C. § 1395oo(f)(1). Plaintiff then brought the matter before this court by filing a timely complaint.

In the early 1970's, the Secretary became concerned that she was paying a disproportionate amount of malpractice costs. The Secretary believed that Medicare patients as a class received smaller malpractice awards than non-Medicare patients. For example, if 32% of a hospital's patients were Medicare patients, it was likely that only 8% of its actual malpractice losses would be attributable to these patients. Based on this concern, the Secretary requested that a study be conducted by Westat. In chapter five of that study, Westat concluded, with obvious reservations about its statistical pool, that the total and average awards to Medicare patients in relation to other patients were disproportionately low.

After the Westat study was submitted to the Secretary, she issued a notice of proposed rule-making with regard to this new malpractice rule allowing 45 days for public comment. 44 Fed.Reg. 15744. Fifteen more days for public comment were then granted. 44 Fed.Reg. 25476. The final rule was then published on June 1, 1979. 44 Fed.Reg. 31641. The new regulation abandoned the traditional utilization method only with regard to malpractice costs. The Secretary did not attempt to directly apportion other general and administrative costs. Prior to this regulation, the general practice of the government was to group together all overhead costs of a hospital, and then to pay a percentage of the costs using the utilization of the hospital facilities by Medicare patients as the standard for reimbursement. Medicare, in the past, had paid slightly more for nursing care and for intensive care units, since Medicare patients disproportionately benefited by these services. The challenged regulation basically ignores the cost of insurance, and instead refers to the actual malpractice loss experience of Medicare patients in determining a hospital's reimbursement for malpractice expenditures.

We focus our analysis on whether the malpractice regulation is in derogation of the statutory power bestowed on the Secretary by the relevant statutes. The burden is on the party challenging the agency action to establish that the agency action was arbitrary, capricious, an abuse of discretion, in excess of statutory authority or not in compliance with necessary procedures.¹ 5 U.S.C. § 706(2)(A) and (C). In order to uphold the regulation, we must first find that the Secretary acted within her statutory power; that the actual choice made even if within her statutory power was not "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law;" and last, the Secretary complied with the necessary procedural requirements. Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416-417, 91 S.Ct. 814, 823-824, 28 L.Ed.2d 136 (1971). We will first examine whether the Secretary acted within her statutory authority.

When reviewing the issue of statutory compliance our scope of inquiry is narrow; basically we need to determine whether the Secretary's decision can reasonably be interpreted to be within her statutory authority. Citizens to Preserve Overton Park, id., 401 U.S. at 416, 91 S.Ct. at 823. Several courts, when dealing with the Medicare Act, have more narrowly interpreted the Secretary's usual broad discretion in determining her own policy, because of the more detailed statutory framework. Northwest Hospital v. Hospital Service Corp., 687 F.2d 985, 988-989 (7th Cir.1982); Pacific Coast Medical Enterprises v. Harris, 633 F.2d 123, 131 (9th Cir.1980); St. John's Hickey Memorial Hospital v. Califano, 599 F.2d 803, 813 (7th Cir.1979).

The Seventh and Ninth Circuits have limited the Secretary's discretion in this area because of the following language:

The reasonable cost of any services shall be the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services, and 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 of classes of institutions, agencies, and services;.... In prescribing the regulations referred to in the preceding sentence, the Secretary shall consider, among other things, the principles generally applied by national organizations or established prepayment organizations (which have developed such principles) in computing the amount of payment, to be made by persons other than recipients of services, to providers of services on account of services furnished to such recipients by such providers.... Such regulations shall (i) take into account both direct and indirect costs of providers of services (excluding therefrom any such costs, including standby costs, which are determined in accordance with regulations to be unnecessary in the efficient delivery of services covered by the insurance programs established under this subchapter) in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this subchapter will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs.

42 U.S.C. § 1395x(v)(1)(A) (emphasis added to highlight the various portions of the statute that are relied on by each party). We find that the Secretary's actions with regard to the malpractice rule are outside of her statutory authority. The Secretary argues that Medicare was never designed to function as a competitive purchaser of health care services on the same economic terms as commercial third-party insurance companies. Medicare is, therefore, able to adopt different means of reimbursement as long as they result in the efficient delivery of medical services to its beneficiaries. The Secretary has cited a recent Supreme Court decision in support of her broad power to determine what a reasonable cost is and what is necessary in the efficient rendering of service. Schweiker v. Gray Panthers, 453 U.S. 34, 43-45, 101 S.Ct. 2633, 2639-2641, 69 L.Ed.2d 460 (1981). In Gray Panthers, the Court was dealing with a Medicaid provision that took into account a spouse's income when determining the funds available to an institutionalized spouse. The Court noted that as a result of the complex nature of the Social Security Act, Congress had bestowed broad power upon the Secretary in prescribing standards for certain sections of the Act. Id. at 43, 101 S.Ct. at 2639. The Court then went on to observe that Congress had explicitly delegated substantive power to the Secretary to determine what resources were available to the applicant. Id. at 43-44, 101 S.Ct. at 2640. In addition, there was Congressional language to support the conclusion that Congress had intended for the Secretary to consider the spouse's funds as available to the applicant. Id. at 44-45, 101 S.Ct. at 2640. Our facts are quite different from those in Gray Panthers. First, we are dealing with a much more circumscribed statute. The Secretary in determining reasonable costs must consider direct and indirect costs of rendering service, and must assure that non-Medicare patients are not bearing costs attributable to Medicare patients. In addition, the Secretary must consider costs that are deemed necessary by other relevant national organizations. It is true that Congress has not explicitly delineated what constitutes a reasonable cost, but it has limited the Secretary's discretion in this area.

The Secretary then contends that this singling out of malpractice insurance costs is...