Presbyterian Medical Center of University of Pennsylvania Health System v. Shalala

• Decision Date: 02 April 1999
• Docket Number: No. 98-5233,98-5233
• Citation: 170 F.3d 1146
• Parties: , 60 Soc.Sec.Rep.Ser. 725 PRESBYTERIAN MEDICAL CENTER OF THE UNIVERSITY OF PENNSYLVANIA HEALTH SYSTEM, Appellant v. Donna E. SHALALA, Secretary, United States Department of Health and Human Services, Appellee
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 1146

170 F.3d 1146

335 U.S.App.D.C. 214, 60 Soc.Sec.Rep.Ser. 725

PRESBYTERIAN MEDICAL CENTER OF THE UNIVERSITY OF PENNSYLVANIA HEALTH SYSTEM, Appellant v. Donna E. SHALALA, Secretary, United States Department of Health and Human Services, Appellee

No. 98-5233.

United States Court of Appeals District of Columbia Circuit.

Argued Feb. 4, 1999.

Decided April 2, 1999.

Appeal from the United States District Court for the District of Columbia (No. 95cv01939)

Jennifer A. Stiller argued the cause for appellant. With her on the briefs was L. Peter Farkas.

Carl E. Goldfarb, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief were Frank W. Hunger, Assistant Attorney General, Wilma A. Lewis, U.S. Attorney, and Scott R. McIntosh, Attorney.

Before: GINSBURG, HENDERSON and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge:

This case involves Medicare's scheme for reimbursing teaching hospitals for the costs of graduate medical education. After the Secretary of Health and Human Services denied appellant teaching hospital's petition for increased reimbursement of such costs, appellant sued in federal district court, challenging the legality of an interpretive rule requiring the requested increase to be supported by contemporaneous documentation, and alleging that an error in the administrative proceedings prejudiced its claims. Finding the interpretive rule consistent with the Department's regulations, and finding no error in the administrative proceedings, we affirm the district court's grant of summary judgment for the Secretary.

I

Medicare reimburses teaching hospitals for the cost of graduate medical education ("GME"), including physician time attributable to instruction and supervision of interns and residents. See 42 U.S.C. § 1395ww(h) (1994). Prior to 1986, teaching hospitals claimed GME reimbursement by preparing annual cost reports showing the portions of physician time attributable to research, patient care, and teaching and supervising interns and residents. To obtain approval of these expenses, hospitals submitted cost reports to fiscal intermediaries, usually insurance companies under contract with the Department of Health and Human Services. The Department required each hospital to support its claim for GME reimbursement with "a written allocation agreement between the [hospital] and the physician that specifies the respective amounts of time the physician spends" on research, patient care, and teaching and supervision. 42 C.F.R. § 405.481(f)(1)(i) (1985). Each hospital also had to "[m]aintain the time records or other information it used to allocate physician compensation in a form that permits the information to be validated by the intermediary," id. § 405.481(g)(1), and to "[r]etain each physician compensation allocation, and the information on which it is based, for at least four years after the end of each cost reporting period to which the allocation applies," id. § 405.481(g)(3).

In 1986, Congress created a new GME reimbursement formula for cost reporting periods beginning on or after July 1, 1985. See Consolidated Omnibus Budget Reconciliation Act of 1985, Pub.L. No. 99-272, 100 Stat. 82, 171-75 (1986) (codified as amended at 42 U.S.C. § 1395ww(h) (1994)) ("GME statute"). Under the new scheme, the Secretary determines for each hospital "the average amount [of GME costs] recognized as reasonable" per full-time resident during a designated "base period," defined as "the hospital's cost reporting period that began during fiscal year 1984." 42 U.S.C. § 1395ww(h)(2)(A). Applying a statutory formula to each hospital's base-year per-resident amount, the Secretary then calculates the hospital's GME reimbursement for subsequent cost-reporting periods. See id. § 1395ww(h)(2)-(3).

In 1989, the Department issued regulations establishing procedures for determining the "reasonable" amount of base-year GME costs for each hospital. See 54 Fed.Reg. 40,286 (1989) (codified at 42 C.F.R. § 413.86 (1998)). (From here on, all "C.F.R." citations refer to current regulations unless otherwise noted.) The GME regulations direct fiscal intermediaries to reexamine the cost reports that hospitals had submitted for the base year and to reaudit "hospitals whose base-period GME costs appear to include misclassified or nonallowable costs or whose per resident amounts appear to be unreasonably high or low." Id. at 40,288; see 42 C.F.R. § 413.86(e)(1). To prevent over-reimbursement, the regulations instruct intermediaries to deduct from each reaudited hospital's base-year GME amount any operating costs misclassified as GME costs. See id. § 413.86(e)(1)(ii)(B). To prevent under-reimbursement--the issue in this case--the regulations authorize intermediaries, "[u]pon a hospital's request," to include in the base-year GME amount any GME costs misclassified as operating costs in the base-year cost report. See id. § 413.86(e)(1)(ii)(C).

Soon after the reauditing process began in 1989, it became clear that many hospitals no longer had contemporaneous physician time records to support GME costs claimed in the base year. Applicable regulations had required hospitals to keep such records for only four years after the relevant cost-reporting period. See 42 C.F.R. § 405.481(g) (1985). The Department therefore issued a special GME documentation policy for reaudits, first as an official instruction to fiscal intermediaries, see HEALTH CARE FINANCING ADMIN., GRADUATE MEDICAL EDUCATION: DOCUMENTATION TO SUPPORT THE PHYSICIAN COST/TIME ALLOCATION (1990) ("HCFA INSTRUCTION"), and then as a published notice in the Federal Register, see 55 Fed.Reg. 35,990, 36,063-64 (1990). The parties agree that this documentation policy is an interpretive rule. See 5 U.S.C. § 553(b)(A).

The interpretive rule provides the following "exception to the established record-keeping policy":

As an equitable solution to the problem of the nonexistence of physician allocation agreements, time records, and other information, we are allowing providers to furnish documentation from cost reporting periods subsequent to the base period in support of the allocation of physician compensation costs in the GME based period.... It is only in the absence of base period documentation that subsequent documentation should be considered as a proxy for base period documentation....

55 Fed.Reg. at 36,063-64. Where a hospital legitimately explains the absence of base-year documentation, the intermediary must advise the hospital that "it may request the special exception described above." Id. at 36,064 col.1. Hospitals requesting the exception must submit "the documentation from the subsequent cost reporting period closest to the direct GME base period." Id. If such records are also unavailable, the hospital may support its base-year GME costs by "perform[ing] a 3-week time study of all physicians' time for a period to be specified by the intermediary." Id.

Of particular importance to this case, the interpretive rule states as follows: "In no event will the results obtained from the use of the records from a cost reporting period later than the base period serve to increase or add physician compensation costs to the costs used to determine the per resident amounts." Id. The rule concludes:

We would stress that the use of documentation from the current year or a subsequent year is, at best, persuasive evidence rather than conclusive evidence [of base-year GME costs]. Accordingly, if the intermediary believes that any of the changes or modifications distort the reliability of the data, it will make whatever adjustments are necessary to ensure an accurate cost allocation. In addition, the intermediary will prepare a written statement documenting the facts and its conclusions concerning how the information distorts the realiability [sic] of the data and why the data should not be relied upon. Also, the intermediary will explain why its adjustments are appropriate. This statement will become part of the record as it may be used to support any action taken in subsequent reviews and appeals.

55 Fed.Reg. at 36,064 col.2.

Appellant Presbyterian Medical Center is a teaching hospital whose GME base period is the fiscal year that ended on June 30, 1985. Presbyterian received notice of reimbursement for that cost-reporting period in September 1988. The notice stated that the Department could re-examine the 1984-85 cost-reporting period at any time up to three years after the date of the notice (i.e., until September 1991).

Acting pursuant to the GME statute and regulations, Presbyterian's fiscal intermediary, Aetna Life Insurance Co., reaudited the hospital's 1984-85 cost report in 1990. Aetna mailed Presbyterian a copy of the HCFA Instruction. Shortly thereafter, Aetna sent Presbyterian a progress report, noting that the hospital failed to provide any documentation supporting its 1984-85 cost report. Attaching a second copy of the HCFA Instruction, Aetna warned that without documentation, it would remove all physician compensation from Presbyterian's base-year GME costs. This time Presbyterian responded. It sent Aetna two types of non-contemporaneous documentation: physician time records for fiscal years 1986-88 and a three-week physician time study for the period from October 1 to October 21, 1990.

After completing the reaudit, Aetna set Presbyterian's base-year GME reimbursement rate at the level the hospital originally claimed in its 1984-85 cost report. In doing so it rejected, without written explanation, Presbyterian's request for an additional $828,000 in GME costs that had allegedly been misclassified as operating costs in the base-year cost report. Beyond the 1986-88 time records and the 1990 time study, the hospital failed to submit any documentation to support its request.

The Provider Reimbursement Review Board reversed Aetna's determination. See Presbyterian Med. Ctr., 95-D41, ...