Paragon Health Network v. Thompson

• Decision Date: 05 June 2001
• Docket Number: No. 00-3707,00-3707
• Citation: 251 F.3d 1141
• Court: U.S. Court of Appeals — Seventh Circuit
• Parties: (7th Cir. 2001) Paragon Health Network, Inc., d/b/a Milwaukee Subacute Center, a/k/a Milwaukee Subacute and Rehabilitation Center, Plaintiff-Appellant, v. Tommy G. Thompson, <A HREF="#fr1-*" name="fn1-*">* Secretary, Department of Health and Human Services, Defendant-Appellee

Page 1141

251 F.3d 1141 (7th Cir. 2001)

Paragon Health Network, Inc., d/b/a Milwaukee Subacute Center, a/k/a Milwaukee Subacute and Rehabilitation Center, Plaintiff-Appellant, v. Tommy G. Thompson,^* Secretary, Department of Health and Human Services, Defendant-Appellee.

No. 00-3707

In the United States Court of Appeals For the Seventh Circuit

Argued April 12, 2001

Decided June 5, 2001

Appeal from the United States District Court for the Eastern District of Wisconsin. No. 98-C-0553--Rudolph T. Randa, Judge. [Copyrighted Material Omitted] Before Flaum, Chief Judge, and Manion and Kanne, Circuit Judges.

Flaum, Chief Judge.

Plaintiff Paragon Health Network, Inc. ("Paragon")¹ appeals from a district court decision affirming a determination that its newly opened skilled nursing facility ("SNF"), Milwaukee Subacute Center ("MSC"), is not eligible for an exemption from the routine cost limits ("RCLs") of Medicare. Paragon contends that the interpretations by the Secretary of Health and Human Services ("Secretary") of the relevant regulation are arbitrary and unreasonable and that the decision denying an exemption to MSC is not supported by substantial evidence. For the reasons stated herein, we affirm.

I. Background

Wisconsin has adopted a set of statutes regulating nursing facilities. Wis. Stat. sec. 150.21, et seq. Wisconsin requires each SNF to have Certificate of Need ("CON") rights for the beds it operates. The state has a moratorium on the issuance of new CON rights; thus, to open a SNF, one must obtain CON rights from a currently existing nursing provider. Wisconsin permits the transfer of CON rights, but only to a related entity that will operate within the same Health Service Area ("HSA") as the current owner of the rights. The state is split into eight HSAs.

Paragon opened MSC as a SNF in downtown Milwaukee, Wisconsin on April 7, 1995, with a capacity of thirty-five nursing beds. MSC obtained the rights to these thirty-five beds from Shores Transitional Care and Rehabilitation Center ("Shores"), another facility owned by Paragon. Shores is located in Glendale, a northern suburb of Milwaukee, and the distance between the two facilities is about seven miles. Both MSC and Shores are located in HSA Number Two, which is approximately eighty miles long, forty to fifty miles wide, and encompasses the city of Milwaukee and seven counties. At the time immediately before the transfer, Shores had CON rights to four-hundred- and-three beds. Shores continues to operate as a separate facility after the transfer of a fraction of its CON rights to MSC. The only thing that MSC received from Shores were the CON rights; no residents, staff, or equipment were transferred.

The RCLs are the maximum amount that the federal government will pay for services under the Medicare program. See generally Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404-06 (1993) (providing a "rough description" of the RCL regime). At the time when MSC opened, 42 C.F.R. sec. 413.30(e) exempted "new providers" from the RCLs for a period of up to two years. MSC applied for this exemption on June 20, 1995, but the Health Care Financing Administration ("HCFA"), the federal agency through which the Secretary administers the Medicare program, denied this request. Paragon appealed to the Provider Reimbursement Review Board ("PRRB"), which conducted an evidentiary hearing and concluded that MSC was not entitled to the new provider exemption. The PRRB found that MSC was a relocated portion of Shores rather than a new facility, relying only on the transfer of CON rights from Shores to MSC in reaching this conclusion.

The PRRB also considered whether MSC would be granted the new provider exemption as a relocated provider serving a substantially different inpatient population. The PRRB stated that MSC could not qualify for the exemption in this manner either because MSC's patients came from the same cities and towns as Shores, which is to say that almost all of the patients of both facilities live in Milwaukee. The HCFA Administrator declined to review the adjudication, and so the PRRB's decision became the final decision of the Secretary. 42 U.S.C. sec. 1395oo(f)(1). Paragon filed suit in district court claiming that the PRRB's decision unreasonably interpreted 42 C.F.R. sec. 413.30(e) and was not supported by substantial evidence, but the court rejected Paragon's arguments and entered summary judgment in favor of the Secretary.

II. Discussion

A. Standard of Review

42 U.S.C. sec. 1395oo(f)(1) states that we review the Secretary's decision under the Administrative Procedure Act. Thus, we will reverse the Secretary's determination only if it is arbitrary, capricious, not supported by substantial evidence, or otherwise deficient under the standards set forth in 5 U.S.C. sec. 706. In addition, we normally defer to the Secretary's reasonable construction of the Medicare regulations. See Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). We first consider whether the regulation is ambiguous. See Christensen v. Harris County, 529 U.S. 576, 588 (2000). If not, then we apply the regulation according to its plain meaning; if so, then the Secretary's interpretation is entitled to "controlling weight unless it is plainly erroneous or inconsistent with the regulation." Thomas Jefferson, 512 U.S. at 512 (internal quotation marks omitted); see also Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945).

B. Secretary's Interpretation

42 C.F.R. sec. 413.30(e) contains an exemption to the Medicare RCLs for a "new provider." A new provider is defined as "a provider of inpatient services that has operated as the type of provider (or the equivalent) for which it is certified for Medicare, under present and previous ownership, for less than three full years."² The Provider Reimbursement Manual ("PRM"), a set of instructions issued by the Secretary that constitutes an administrative interpretation of the Medicare statute and regulations, see Shalala v. Guernsey Mem'l Hosp., 514 U.S. 87, 101-02 (1995) (referring to PRM provisions as interpretive rules), provides further guidance on new provider exemptions. PRM sec. 2604.1 reiterates the definition of new provider contained in the regulation, and then states that a provider which relocates could be granted new provider status if it meets certain conditions.³

In denying that MSC was a new provider, the PRRB relied solely on the fact that MSC had acquired CON rights from Shores. In determining the length of time a provider has "operated," the Secretary considers the "previous ownership" of the SNF's CON rights. The operating history of the SNF from which any CON rights were obtained is imputed to the acquiring provider. In the instant case, this interpretation caused the PRRB to conclude that MSC had been operating since 1979, the year Shores opened, since MSC and Shores provide the same type of service. Instead of MSC being a new provider, the PRRB decided that MSC was a relocated part of Shores.

C. New Provider

1. Challenges to Seminole Rock deference.

Paragon has a number of arguments as to why the Secretary's interpretation is incorrect, but the contentions we will initially consider regard the weight that should be given to the Secretary's construction of 42 C.F.R. sec. 413.30(e). Paragon claims that the deference normally accorded agency interpretations of their own regulations is warranted only where the interpretation is both contemporaneous with the regulation and consistently applied. Appellant claims that the contemporaneity requirement for deference is not satisfied here because the Secretary's interpretation relying solely on the transfer of CON rights to deny that a SNF is a new provider was not made until 1995, while the regulation was promulgated in 1979. Paragon also contends that the interpretation has not been consistent, relying on PRM sec. 2154.2.C., which defines "relocate" as "[t]o move an existing provider to a new location and close the old provider." Paragon claims that this is the only definition of "relocate" in the PRM, and so should be applied whenever that word appears in the Medicare statute, regulations, or PRM provisions. Paragon seizes upon the last part of this definition to argue that MSC cannot be a relocated provider since the old provider, Shores, has not closed. Thus, the PRRB was inconsistent in labeling MSC as a relocated provider since this decision ignored the definition of "relocate" contained in the PRM.

The Secretary claims that the current interpretation of 42 C.F.R. sec. 413.30(e) is not new, but does not cite any decision construing that regulation in the manner at issue here until 1995. The Secretary also cites a number of post-1995 PRRB decisions that have consistently applied the proffered interpretation. Appellee claims that the definition of "relocate" contained in PRM sec. 2154.2.C. has never been applied to new provider exemptions and concerns a completely different subject. HCFA has long recognized the concept of a partial relocation in applying new provider exemptions from the RCLs.

Before we address the legal issues, we set forth the history of the interpretation of 42 C.F.R. sec. 413.30(e) as best we can determine from the submissions of both parties. That regulation has been given the same consistent interpretation since 1995, but neither party has provided evidence of any construction prior to that time. Thus, we assume that the regulation was first authoritatively construed in 1995. We also accept that the definition of "relocate" contained in PRM sec. 2154.2.C. has not been applied to the regulations concerning exemptions and the concept of a partial relocation has been recognized by HCFA.

We first conclude that the apparent lack of contemporaneity between the promulgation of the regulation and the Secretary's interpretation of it does not affect the high level of deference we owe to the Secretary. In the context of judicial...