Select Specialty Hosp.–bloomington Inc. v. Sebelius

• Decision Date: 31 March 2011
• Docket Number: Civil Case Nos. 09cv2008 (RJL),09cv2362 (RJL).
• Citation: 774 F.Supp.2d 332
• Court: U.S. District Court — District of Columbia
• Parties: SELECT SPECIALTY HOSPITAL–BLOOMINGTON, INC., et. al, and Select Specialty Hospital–Augusta, Inc., et. al, Plaintiffs,v.Kathleen SEBELIUS, Secretary U.S. Dep't of Health and Human Services, Defendant.

774 F.Supp.2d 332

SELECT SPECIALTY HOSPITAL–BLOOMINGTON, INC., et. al, and Select Specialty Hospital–Augusta, Inc., et. al, Plaintiffs,

v.Kathleen SEBELIUS, Secretary U.S. Dep't of Health and Human Services, Defendant.

Civil Case Nos. 09cv2008 (RJL)

09cv2362 (RJL).

United States District Court, District of Columbia.

March 31, 2011.

Andrew C. Bernasconi, Jason M. Healy, Reed Smith, LLP, Washington, DC, for Plaintiffs.Mitchell P. Zeff, U.S. Attorney's Office, Washington, DC, for Defendant.

MEMORANDUM OPINION

RICHARD J. LEON, District Judge.

Plaintiffs Select Specialty Hospital Bloomington (“SSH Bloomington”) et al. and Select Specialty Hospital Augusta et al. (“SSH Augusta” and collectively, “plaintiffs”), bring this action against Health and Human Services (“HHS”) Secretary Kathleen Sebelius (“defendant” or “the Secretary”), alleging violations of the Administrative Procedure Act (“APA”), 5 U.S.C. § 706, and the U.S. Constitution, seeking—among other things—determinations that agency decisions were arbitrary, capricious, and not supported by substantial evidence. Before this Court are plaintiffs' Consolidated Motion for Summary Judgment, July 23, 2010 (“Pls.' Mot. for Summ. J.”) [Dkt. # 17] and defendant's Cross Motion for Summary Judgment, Oct. 21, 2010 (“Def.'s Cross Mot.”) [Dkt. # 18]. Upon consideration of the parties' pleadings, relevant law, and the entire record herein, plaintiffs' Motion for Summary Judgment is DENIED and defendant's Cross Motion for Summary Judgment is GRANTED IN PART and DENIED IN PART.

BACKGROUND

I. Medicare's Statutory and Regulatory BackgroundA. Reimbursement Process

Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., establishes the federal Medicare health insurance program for the elderly and disabled (“beneficiaries”). Medicare operates by authorizing payments for in-patient and out-patient health-care services to “providers,” such as hospitals, skilled nursing facilities, outpatient rehabilitation facilities, and home health agencies. 42 U.S.C. §§ 1395cc(a), 1395x(u).

The Centers for Medicare and Medicaid Services (“CMS”) administers Medicare on behalf of the Secretary. See id. CMS, in turn, contracts with insurance companies who operate as “fiscal intermediaries” for the program and perform payment and audit duties. Id. § 1395h. Fiscal intermediaries are charged with an important role: determining, in the first instance, the reimbursement amount Medicare providers are due under law and interpretive guidelines. 42 U.S.C. §§ 1395h, 1395kk–1; 42 C.F.R. § 413.20(b).

To obtain reimbursement, a provider files an annual Medicare cost report with its fiscal intermediary, detailing the costs incurred from providing health services to beneficiaries. 42 C.F.R. § 413.24(f); § 405.1801(b)(1). The intermediary reviews the cost report and issues a notice of provider reimbursement (“NPR”) stating the amount of Medicare reimbursement due to the provider. Id. § 405.1803. If the fiscal intermediary denies a requested reimbursement, or if the provider is otherwise dissatisfied with the reimbursement amount, the provider may appeal the intermediary's determination to the Provider Reimbursement Review Board (“PRRB” or “the Board”).¹ 42 U.S.C. § 1395 oo(a). The PRRB's decision is final and represents the Secretary's final decision unless she explicitly reverses, affirms, or modifies the Board's decision. Id. § 1395 oo(f). If a provider is dissatisfied even after an appeal to the Board, the provider may seek judicial review pursuant to 42 U.S.C. § 1395 oo(f)(1); 42 C.F.R. § 405.1877(b).

B. Reimbursement Coverage

In general, Medicare pays for a provider's “allowable costs,” which primarily consist of operating and capital-related costs. 42 U.S.C. § 1395ww(a)(4). With respect to operating costs, CMS reimburses inpatient medical services through a prospective payment system (“Inpatient PPS”) which establishes a predetermined reimbursement fee for each patient instead of reimbursing based on the provider's actual costs. 42 U.S.C. § 1395ww(d); see also Washington Hosp. Ctr. v. Bowen, 795 F.2d 139 (D.C.Cir.1986). Until 1987, capital-related expenses were excluded from the definition of “operating costs,” 42 U.S.C. § 1395ww(a)(4), and were instead reimbursed under a more generous “reasonable cost” calculation. 42 C.F.R. § 413.130 et seq. In 1987, however, Congress passed a law directing HHS, through CMS, to develop and implement by October 1, 1991, a prospective payment system (“Capital PPS”) to reimburse the capital-related costs for inpatient, acute-care hospitals. Omnibus Budget Reconciliation Act of 1987, Pub.L. No. 100–203 § 4006(b)(1) (1987) (amending 42 U.S.C. § 1395ww(g)). Thus, when Capital PPS was implemented in 1991, the “reasonable cost” methodology for reimbursing capital costs was replaced with a ten-year transition to a less lucrative prospective payment system. 56 Fed.Reg. 43,358 (Aug. 30, 1991) (final rule).

Importantly, during the ten-year transition, the Secretary exempted ² “new hospital[s]” from Capital PPS for the first two years of their operations. 67 Fed.Reg. 49,982–01, 50,101 (Aug. 1, 2002) (final rule). During that time, “new hospitals” would be reimbursed at 85 percent of “reasonable costs,” id., instead of under the less lucrative Capital PPS methodology. Although the exemption originally spanned the ten-year transition period to Capital PPS, 56 Fed.Reg. 43,363, the Secretary later extended the “new hospital” exemption indefinitely for cost-reporting periods beginning October 1, 2002. 67 Fed.Reg. 49,982–01, 50,101 (Aug. 1, 2002) (final rule).³

II. Procedural and Factual Background ⁴

Plaintiffs ⁵ are Medicare-participant Long–Term Acute–Care Hospitals (“LTCHs”). Bloomington Compl., Oct. 23, 2009, ¶ 1 (“Bloomington Compl.”) [No. 9–cv–2008, Dkt. # 1]; Augusta Compl., Dec. 14, 2009, ¶¶ 12–30 (“Augusta Compl.”) [No. 9–cv–2362, Dkt. # 1]. Often maintaining only thirty or forty beds, LTCHs are “designed, staffed, and operated specifically to treat medically complex patients requiring long hospital stays.” Pls.' Consol. Mot. for Summ. J., July 23, 2010, at 6 (“Pls.' Mot. for Summ. J.”) [Dkt. # 17]; see also 42 U.S.C. § 1395x(ccc). Indeed, to qualify as an LTCH, a hospital must treat Medicare beneficiaries whose average length of stay is greater than twenty-five days. Pls.' Mot. for Summ. J. at 6; Def.'s Cross Mot. at 5; see also 42 C.F.R. § 412.23(e); 42 U.S.C. § 1395x(ccc). In addition to being LTCHs, all but two plaintiffs ⁶ are also characterized as hospitals-within-hospitals (“HIHs”): independent providers located in the same building or on the same campus as a preexisting “host” hospital. 42 C.F.R. § 412.22(e); Def.'s Cross Mot. at 7.

This case concerns one critical issue: whether plaintiffs were “new hospitals” under 42 C.F.R. § 412.300(b) for capital-cost reimbursement during their “start-up cost[-] reporting periods.” Bloomington A.R. at 11 (Provider Reimbursement Review Board Decision (“PRRB Decision”), Aug. 19, 2009); Augusta A.R. at 14 (PRRB Decision, Oct. 15, 2009). Practically speaking, the question is whether plaintiff hospitals are entitled to capital-cost reimbursement under Capital PPS, or the more favorable 85–percent–of–reasonable–cost methodology. The answer turns on whether plaintiffs meet the definition of “new hospital” under 42 C.F.R. § 412.300(b).

42 C.F.R. § 412.300(b) states that a “new hospital” is a “hospital that has operated (under previous or present ownership) for less than 2 years.” Id. The regulation excludes the following hospitals from the definition of “new hospital”:

(1) a hospital that builds new or replacement facilities at the same or another location even if coincidental with a change of ownership, a change in management, or a lease arrangement; (2) a hospital that closes and subsequently reopens; (3) a hospital that has been in operation for more than 2 years but has participated in the Medicare program for less than 2 years; [and] (4) a hospital that changes its status from a hospital that is excluded from the prospective payment systems to a hospital that is subject to the capital prospective payment systems. 42 C.F.R. § 412.300(b)(1)-(4).

It is undisputed that plaintiffs are now ⁷ LTCHs, all but two ⁸ of which operate as HIHs. Bloomington A.R. 781 ¶ 3; Augusta A.R. 230 ¶ 3. It is also undisputed that although each plaintiff had been operating as a hospital for less than two years, Bloomington Compl. ¶ 45,⁹ “[a]ll of the buildings where the Providers lease[d] space were operated by the host hospital for more than 2 years prior to the lease arrangement.” Bloomington A.R. 11, 781; Augusta A.R. 14, 230 ¶ 4. Each plaintiff incurred capital-related start-up costs from renovating the existing facilities, Bloomington A.R. 298–303, Augusta A.R. 183–90, and each identified itself as a “new hospital” when submitting Medicare cost reports to its intermediary.¹⁰ Bloomington A.R. 10; Augusta A.R. 14. As a result, each plaintiff requested reimbursement under the “new hospital” exemption—that is, reimbursement for 85 percent of reasonable cost instead of under Capital PPS. Id.

Each fiscal intermediary issued an NPR for that cost-reporting period finding that plaintiffs were not “new hospitals” for the purpose of capital costs and, as a result, reimbursed each plaintiff at the lower Capital PPS rate. Id. Plaintiffs appealed the intermediaries' adjustments and determinations to the PRRB. Bloomington A.R. 82–199, 787–836; Augusta A.R. 420–776. Upon review, the PRRB found that the definition of “new hospital” in 42 C.F.R. § 412.300(b) was “ambiguous” as to whether a “hospital” is defined by the business entity of the hospital or the “individual physical assets” of a hospital. Bloomington A.R. 16; Augusta A.R. 19.

Ultimately, a three-member majority of the Board concluded that the term “hospital ... requires, at the very least, an analysis of the physical assets,” and as a result, the regulation intends “new hospitals” to...