Robert Wood Johnson University Hosp. v. Thompson

• Decision Date: 12 July 2002
• Docket Number: No. 01-2555.,01-2555.
• Citation: 297 F.3d 273
• Parties: ROBERT WOOD JOHNSON UNIVERSITY HOSPITAL, a Non-Profit Corporation, Appellant, v. Tommy G. THOMPSON, United States Department of Health and Human Services.
• Court: U.S. Court of Appeals — Third Circuit

297 F.3d 273

ROBERT WOOD JOHNSON UNIVERSITY HOSPITAL, a Non-Profit Corporation, Appellant, v. Tommy G. THOMPSON, United States Department of Health and Human Services.

No. 01-2555.

United States Court of Appeals, Third Circuit.

Argued March 5, 2002.

Filed July 12, 2002.

Robert L. Roth (Argued), Crowell & Moring, Washington, D.C., for appellant.

Robert J. Cleary, United States Attorney, Susan Handler-Menahem (Argued), Assistant United States Attorney, Office of the United States Attorney, Newark, N.J., for appellee.

Before: SLOVITER, AMBRO and SHADUR,^* Circuit Judges.

OPINION OF THE COURT

SLOVITER, Circuit Judge.

Robert Wood Johnson University Hospital (Hospital), which is located in New Brunswick, New Jersey, sought reimbursement from Medicare for the Federal Fiscal Year (FFY) 2002 using the average hourly wage (a component of the reimbursement rate) of hospitals located in New York City, 12 miles away, with which it competes for its staff. There is a procedure under Medicare for reclassification of a hospital into an adjacent metropolitan statistical area (MSA) so that the hospital can use that MSA's higher reimbursement rate, provided the hospital meets certain criteria. One of those criteria is that the average hourly wage of the hospital seeking reclassification must be 84% of that of the hospitals in the area to which it seeks reclassification. The Hospital did not meet this criterion (almost, but not quite). To satisfy the 84% criterion, it sought to have the average hourly wage of the New York City hospitals reduced by interpreting a statutory provision to require inclusion of the average hourly wage of the hospitals located in Orange County, New York. It was unsuccessful in this attempt, and appeals. As will soon be seen, the statutory issues presented by this appeal are much more complex than suggested by this simplified introduction.

I. BACKGROUND

A. Medicare Generally

Medicare, established under Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. (2001), provides a system of federally-funded health insurance for eligible elderly and disabled individuals. Under the Medicare statute, hospitals and other health care providers enter into written provider agreements with the Secretary of Health and Human Services (Secretary) in order to render services to Medicare beneficiaries and receive reimbursement. § 1395cc.

B. Provider Payment System

Most health care providers which have entered into provider agreements with the Secretary, as has the Hospital, are reimbursed through the Prospective Payment System (PPS). This system reimburses hospitals not for their actual incurred costs but for costs based on prospectively fixed rates for each category of treatment. § 1395ww(d). Concerned about escalating Medicare expenditures, Congress designed the PPS to encourage providers to be more efficient and reduce operating costs by reimbursing them with a standard amount for each service regardless of the cost actually incurred. See Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C.Cir.1994) (citing H.R.Rep. No. 98-25, at 132 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 351; S.Rep. No. 98-23, at 47 (1983), reprinted in 1983 U.S.C.C.A.N. 143, 187).

Hospitals receive payment for the services they perform on Medicare beneficiaries based upon the "diagnosis related group" (DRG) within which the service falls. 42 C.F.R. § 412.60 (2001). The payment rates for the upcoming federal fiscal year (FFY) for each DRG are published in the Federal Register, first in the form of a proposed rule and then in the form of a final rule published on or about August 1 for the FFY beginning on October 1 of that year. 42 U.S.C. § 1395ww(d)(6); 42 C.F.R. § 412.8. This system notifies hospitals in advance of the amount of payment they should expect to receive per patient for each DRG.

In order to account for wide variations in the cost of labor across the country, the amount of a hospital's payment under the PPS will vary depending on its location. First, hospitals are assigned a standardized rate based on whether they are located in a county in a "large urban," "urban," or "rural" area. See Athens Cmty. Hosp Inc. v. Shalala, 21 F.3d 1176, 1177 (D.C.Cir.1994). A wage area in a "large urban" or "urban" location is known as a Metropolitan Statistical Area (MSA). After calculating the standardized rate based on the area, the hospital's payment rates are computed by adjusting the standardized amount by a "wage index" to account for area wage differences. 42 U.S.C. § 1395ww(d)(3)(E).

The wage index is updated each year based on hourly wage data collected from the hospitals. Each hospital provides the Secretary with data including the total salaries paid to and hours worked by its employees. § 1395ww(d)(3)(E). The Secretary computes the average hourly wage for a labor market area by adding the total of the salaries and fringe benefits paid by the hospitals within that area, and dividing that figure by the total number of hours worked. Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2001 Rates, 65 Fed.Reg. 47,054, 47,074-76 (Aug. 1, 2000) (to be codified at 42 C.F.R. pts. 410, 412, 413 & 485). The Secretary uses this data to create the wage index for each geographic area. The wage index compares the average hourly wage for hospitals in a given geographic area with the national average hourly wage, which in turn determines the payment rate above or below the national average at which a hospital is reimbursed. Id. The wage index for an area generally applies to all hospitals physically located within that geographic area. Thus, the wage index has a significant effect on the amount of reimbursement a hospital receives.

C. Geographic Reclassification

The system described above, while appropriate in most instances, yielded inequitable results for some hospitals. In some cases, a hospital in one area competed for the same labor pool as hospitals in a nearby, larger urban area but received a lower reimbursement because the wage index was lower for the area in which it was geographically located. Because this situation resulted in some hospitals being underpaid for their labor costs, Congress amended the Medicare Act in order to allow a hospital to seek reclassification from its geographically-based wage area to a nearby wage area for payment purposes if it meets certain criteria. 42 U.S.C. § 1395ww(d)(10); see also Athens, 21 F.3d at 1177-78 (explaining history of geographic reclassification statute). Reclassification allows a hospital to use the wage index of the nearby area to determine the PPS payments for that year. Reclassifications are temporary, and hospitals that qualify must apply every three years. § 1395ww(d)(10)(D)(v).¹

Congress established the Medicare Geographic Classification Review Board (MGCRB) to pass upon applications for geographic reclassification according to certain standards and guidelines. § 1395ww(d)(10). Congress gave the Secretary the authority to formulate the guidelines to be used by the MGCRB. § 1395ww(d)(10)(D). Most of the applicable guidelines are published at 42 C.F.R. § 412.230 et seq.

Under the guidelines, for an urban hospital, such as the Hospital, to qualify for reclassification, it must submit its average hourly wage data, and that data must demonstrate, inter alia, that the hospital's average hourly wage equals at least 84% of the average hourly wage of "hospitals in the area to which it seeks redesignation." 42 C.F.R. § 412.230(e)(1)(iv)(C). Reclassifications for the years relevant here used the average hourly wage for the preceding year. § 412.230(e)(2)(i). Thus, reclassifications for FFY 2002 were based on the average hourly wage data for FFY 2001.

In making a reclassification determination, the Secretary has ruled that "hospitals must use the wage survey data for a labor market area absent any reclassifications granted by the MGCRB." Medicare Geographic Classification Review Board — Procedures and Criteria, 56 Fed.Reg. 25,458, 25,477 (June 4, 1991) (to be codified at 42 C.F.R. pt. 412). In other words, when a hospital is trying to determine if its average hourly wage equals at least 84% of that of the area to which it seeks reclassification, it must compare itself to the wage data of those hospitals physically located within the geographic area to which it seeks reclassification exclusive of any hospitals that have been reclassified to that area. This policy is known as the "reclassification exclusion" or "exclusion" policy. Among other things, this policy serves to prevent the applicant hospital comparing its average hourly wage to wage data that includes its own data from a previous year in which it reclassified to that area. This policy is discussed in greater detail below. See infra Part III.B.

The reclassification process, of necessity, occurs on a tight timeline. Hospitals were required to submit their applications for reclassification for FFY 2002 to the MGCRB by September 1, 2000. 42 U.S.C. § 1395ww(d)(10)(C)(ii); 42 C.F.R. § 412.276. The MGCRB then had until February 28, 2001 to render decisions on all FFY 2002 applications. 42 U.S.C. § 1395ww(d)(10)(C)(iii)(I). If an applicant hospital was dissatisfied with the decision, it could seek review of the decision by the Secretary's delegate, the Administrator of the Health Care Financing Administration (HCFA),² whose decision was required within ninety days of the filing of the appeal. § 1395ww(d)(10)(C)(iii)(II). The decision of the Secretary on an application for reclassification is final and is not subject to judicial review. Id.

D. The Balanced Budget Refinement Act of 1999

The Hospital's position in this matter is based on section 152(b) of the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act (BBRA) of 1999, Pub.L. No. 106-113 Appendix F, 113 Stat. 1501A-321, 334-35 (1999). In section 152(a) and (b), Congress deemed certain specified geographic areas to be...