Public Hosp. Dist. No. 1 v. Sullivan, CS-92-0160-WFN.

• Decision Date: 23 July 1992
• Docket Number: No. CS-92-0160-WFN.,CS-92-0160-WFN.
• Citation: 806 F. Supp. 1478
• Court: U.S. District Court — District of Washington
• Parties: PUBLIC HOSPITAL DISTRICT NO. 1, GRANT COUNTY, WASHINGTON, Plaintiff, v. Louis W. SULLIVAN, M.D., Secretary of Health and Human Services, Defendant.

806 F. Supp. 1478

PUBLIC HOSPITAL DISTRICT NO. 1, GRANT COUNTY, WASHINGTON, Plaintiff, v. Louis W. SULLIVAN, M.D., Secretary of Health and Human Services, Defendant.

No. CS-92-0160-WFN.

United States District Court, E.D. Washington.

July 23, 1992.

Anita D. Lee, Los Angeles, Cal., Paul L. Ahern, Bellevue, Wash., for plaintiff.

Carroll Gray, Asst. U.S. Atty., Spokane, Wash., for defendant.

ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

WM. FREMMING NIELSEN, District Judge.

Before the Court are the parties' cross Motions for Summary Judgment, Ct.Recs. 14 and 25. Plaintiff is a public health district which operates Samaritan Hospital, a 50-bed acute care hospital in Moses Lake, Washington. Samaritan is certified as a provider of services in the federal Medicare program. Defendant is the federal officer responsible for the administration of Medicare. Jurisdiction is proper under Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395-1395ccc and 1395oo(f)(1). Venue is proper under 42 U.S.C. § 1395(f)(1). After review of the file, the administrative record, memoranda submitted by the parties, oral argument and Plaintiff's objections to the Report and Recommendation, Plaintiff's Motion for Summary Judgment is DENIED; Defendant's Motion for Summary Judgment is GRANTED.

The Medicare statutes, 42 U.S.C. § 1395-1395ccc, established a federally funded system of health insurance for the aged and disabled. Samaritan entered into a written agreement with Defendant to provide hospital services to eligible Medicare patients in exchange for reimbursement by Defendant. In conjunction with its claim for payment, Samaritan applied on October 25, 1985 for designation as a sole community hospital ("SCH") based upon its assertion substantially all of its staff physicians admitted their patients to Samaritan, and the hospital was more than twenty-five miles away from the next closest hospital with comparable service. (S.Tr.¹ at 1, 7 and 57.) The Health Care Financing Administration (HCFA), which administers the Medicare payment program, denied Samaritan's request to be designated an SCH for the fiscal years ending December 31, 1985 and 1986.² (S.Tr. at 4.) In its findings, HCFA noted there were several hospitals within relevant proximity to Samaritan.³ (S.Tr. at 60.) Based on these facts, HCFA found Samaritan failed to establish the necessary criteria of 42 C.F.R. § 412.92(a)(3): "Because of local topography or periods of prolonged severe weather conditions, the other like hospitals are inaccessible for at least one month out of each year."

On May 5, 1986, Samaritan appealed the adverse decision to the Providers Reimbursement Review Board (PRRB), contending 42 C.F.R. § 412.92(a)(3) is inconsistent with the enabling statute 42 U.S.C. § 1395ww(d)(5)(C)(ii) and congressional intent. (S.Tr. at 3.) The PRRB granted a request for review⁴ (S.Tr. at 2.) and on April 22, 1991, a complaint was filed in this court. On September 18, 1991, Plaintiff moved for summary judgment. (Ct.Rec. 14.) On March 9, 1992, Defendant filed a cross Motion for Summary Judgment. The Motions were submitted to this court on May 11, 1992.

In its Motion for Summary Judgment, Plaintiff admits Samaritan does not meet the regulatory criteria required for designation as an SCH. Samaritan does not contest any factual finding that supported the denial. Rather, it contends the applicable regulation, 42 C.F.R. § 412.92(a)(3) is invalid for two reasons: (1) The criteria in (a)(3) are considerably more restrictive than the criteria previously applied, rendering the regulation inconsistent with congressional intent; and (2) the Secretary failed to articulate a rationale for choosing the more restrictive criteria in violation of the Administrative Procedure Act, 5 U.S.C. § 705, et seq. See Motor Vehicle Manufacturers Ass'n v. State Farm Mutual, 463 U.S. 29, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983). In response, Defendant asserts the regulation is valid because it was promulgated by the Secretary within the congressional guidelines.

PRE-1983 BACKGROUND

Reimbursement of expenses incurred by Medicare patients is available to provider hospitals under Part A of the Medicare program. Since Medicare's inception, two payment systems have been utilized to provide payment to hospitals. The first, in existence from 1965 to 1983, provided reimbursement to the hospital for the lesser of either the reasonable cost or customary charge incurred. 42 U.S.C. § 1395f(b). The regulations set specific limits on costs and also provided for certain exemptions to those limits, including hospitals that qualified as an SCH. 42 C.F.R. § 405(e)(1). The exemption was in recognition of congressional intent that cost limitations,

Will not be applicable where there is only one hospital in a community — that is, where, if the provision were applied, additional charges could be imposed on beneficiaries who have no real opportunity to use a less expensive NON-LUXURY institution, and where the provision would be difficult to apply because COMPARATIVE cost data for the area are lacking.

H.R.Rep. No. 231, 92d Cong., 2d Sess., reprinted in 1972 U.S.C.C.A.N. 4989, 5070. An SCH was then defined by the Secretary as a "hospital, by reason of factors such as isolated location or absence of other hospitals, is the sole source of such care reasonably available to beneficiaries." 42 C.F.R. § 405.460 (1980). Subsequently in 1982, Congress expressly authorized the Secretary to create the SCH exemption by amending 42 U.S.C. § 1395ww(a)(2)(A). That amendment did not specify any particular factors the Secretary was to consider in defining an SCH. However, Intermediary Letters ("I.L.") were issued by the HCFA for use by their regional offices discussing various factors that were to be considered in determining SCH status. I.L.⁵ No. 74-22 (July, 1974) stated in pertinent part:

The determination that a hospital is the sole source of hospital services reasonably available to beneficiaries is based on such factors as (1) the normal commuting distance to work for residents of the locality served by the hospital, (2) travel time and availability of public transportation to the nearest like facility, and (3) the extent to which persons travel to other localities for hospital care.

The letter further provided "generally, ... a hospital located within a 25-mile radius of a like facility ... cannot be found to qualify for a sole community hospital exemption." Id. A subsequent letter, I.L.⁶ 78-17 (April, 1978), identified certain other factors which should be considered in addition to isolation:

Physical isolation of the hospital and its service area, as demonstrated by the absence of reasonably accessible like facilities, or isolation of the hospital and its service area due to unusual local circumstances which results in general nonuse of the otherwise closest like facilities by residents in the hospital's service area is the key factor to a determination that a hospital is an SCH within the meaning of regulations.... Examples of unusual local circumstances include, but are not limited to, adverse topographical conditions, extended periods of adverse weather conditions, and hospital admitting patterns of physicians in practice in the hospital's service area. (Emphasis added.)⁷

Based upon these administrative definitions, approximately 277 SCH hospitals were approved. (R.R.⁸ at 7.) Those hospitals that were not approved found some relief in the courts which overturned on several occasions the Secretary's decision to deny them SCH status. See St. Elizabeth Community Hospital v. Heckler, 745 F.2d 587 (9th Cir.1984); Graham Hosp. Ass'n v. Heckler, 739 F.2d 285 (7th Cir. 1984); Central Wash. Health Serv. Ass'n v. Harris, 497 F.Supp. 1143 (E.D.Wn.1980).

BACKGROUND: POST-1983

In 1983, Congress adopted the second payment system which eliminated retroactive reimbursement and substituted a prospective payment system ("PPS"). PPS pays the provider a fixed amount for each Medicare patient based upon a discharge or patient diagnosis classified by national or regional diagnosis-related groups ("DRG"). PPS was implemented over four years during which an increasing portion of the provider's payment rate was based upon the regional or national rate per DRG.⁹ 42 U.S.C. § 1395ww(d)(1)(A), amended by 42 U.S.C. § 1395ww(d)(1)(C). Beginning October 1, 1987, payment was to be made only under the PPS system. PPS allows hospitals to plan more accurately for the future and creates incentives for hospitals to operate in a more cost efficient manner. Hospitals are allowed to keep the payments made in excess of expenses and must absorb the costs incurred in excess of payments. S. Rep. No. 23, 98th Cong., 1st Sess., reprinted in 1983 U.S.C.C.A.N. 143, 187.

Because of the negative impact of PPS on inefficiently managed hospitals, Congress recognized those hospitals would be forced to close and patients would have to seek care elsewhere. The adverse impact on patients would be minimal except in the instance of an SCH. Therefore, once again, such hospitals were allowed to operate on a blended system, set in 1983 at 75% reimbursement of the hospital's specific costs and 25% prospective payment.¹⁰ 42 U.S.C. § 1395ww(d)(5)(C)(ii).

Recognizing the lack of a statutory definition of SCH, the 1983 amendments included one at 42 U.S.C. § 1395ww(d)(5)(C)(ii):

For purposes of this subparagraph, the term "sole community hospital" means a hospital that, by reason of factors such as isolated location, weather conditions, travel conditions, or absence of other hospitals (as determined by the Secretary), is the sole source of inpatient hospital services reasonably available to individuals in a geographical area who are entitled to benefits under part A 42 U.S.C. §§ 1395c, et seq.. (Emphasis added.)

The underlined parenthetical phrase and other statutory language grants to the Secretary express authority to create regulations to further define and apply the...