South Shore Hosp., Inc. v. Thompson

• Decision Date: 16 October 2002
• Docket Number: No. 02-1284.,02-1284.
• Citation: 308 F.3d 91
• Parties: SOUTH SHORE HOSPITAL, INC., d/b/a South Shore Hospital Transitional Care Center, Petitioner, Appellee, v. Tommy G. THOMPSON, Secretary of Health and Human Services, Respondent, Appellant.
• Court: U.S. Court of Appeals — First Circuit

308 F.3d 91

SOUTH SHORE HOSPITAL, INC., d/b/a South Shore Hospital Transitional Care Center, Petitioner, Appellee, v. Tommy G. THOMPSON, Secretary of Health and Human Services, Respondent, Appellant.

No. 02-1284.

United States Court of Appeals, First Circuit.

Heard September 12, 2002.

Decided October 16, 2002.

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Anthony A. Yang, Attorney, Appellate Staff, Civil Division, United States Department of Justice, with whom Michael J. Sullivan, United States Attorney, Robert D. McCallum, Jr., Assistant Attorney General, and Barbara C. Biddle, Attorney, Appellate Staff, were on brief, for appellant.

Donald R. Frederico, with whom Peter R. Leone and McDermott, Will & Emery were on brief, for appellee.

Before SELYA, LYNCH and LIPEZ, Circuit Judges.

SELYA, Circuit Judge.

This appeal leads us into the often surreal world of Medicare administration. It arises out of efforts by South Shore Hospital (the Hospital), an acute care hospital located in South Weymouth, Massachusetts, to obtain relief for its transitional care center (the TCC) from Medicare's cost limits on reimbursement of routine patient care expenses. The Health Care Financing Administration (HCFA) denied the Hospital's application on the ground that its purchase of determination of need (DON) rights from an unaffiliated nursing home rendered unavailable the so-called "new provider" exemption codified at 42 C.F.R. § 413.30(e)(2) (1994).¹ The Provider Reimbursement Review Board (the Board) of the United States Department of Health and Human Services (HHS) affirmed this determination. See S. Shore Hosp., No. 99-D38, 1999 WL 297452 (PRRB Apr. 21, 1999) (S. Shore I). The federal district court, however, took a different view, reversing the Board's decision. S. Shore Hosp. v. Thompson, 204 F.Supp.2d 76, 83 (D.Mass.2002) (S. Shore II). This timely appeal ensued.

We conclude that the new provider exemption is less than pellucid; that the Secretary's interpretation of the relevant regulatory language is reasonable (although not inevitable); that the Hospital has failed to show that the Secretary vacillated in his interpretation; and that substantial evidence supports the Board's finding that the now-defunct nursing home from which the Hospital acquired the necessary DON rights operated as an equivalent of the TCC. Consequently, we sustain the Secretary's refusal to classify the TCC as a new provider, reverse the decision of the district court, and direct the entry of judgment in favor of the Secretary.

I. STATUTORY AND REGULATORY FRAMEWORK

The Medicare Act, 42 U.S.C. §§ 1395-1395ggg, provides federal funding for a range of medical services for the elderly and disabled, including reimbursement for the reasonable cost of certain services provided by skilled nursing facilities (SNFs). Id. § 1395f(b)(1); 42 C.F.R. § 413.1(a)(2)(ii), (b), (g). The Act expressly vests in the Secretary of HHS the discretion to determine reasonable costs by regulations that, inter alia, "may provide for the establishment of limits on the [costs] to be recognized as reasonable based on estimates of the costs necessary in the efficient delivery of needed health services." 42 U.S.C. § 1395x(v)(1)(A). In this regard, the Act mandates routine cost limits (RCLs) that restrict per diem reimbursement to 112% of the national average for similarly situated providers.² Id. § 1395yy(a). Exemptions and exceptions that permit higher rates of reimbursement are allowed "to the extent the Secretary deems appropriate, based upon case mix or circumstances beyond the control of the facility." Id. § 1395yy(c).

At issue here is an exemption for "new providers" of skilled nursing services. 42 C.F.R. § 413.30(e)(2). The Secretary promulgated this exemptive regulation in 1979 to ameliorate the "initial underutilization" faced by many market entrants. 44 Fed. Reg. 31,802. It authorizes an exemption when "[t]he provider of inpatient services 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." 42 C.F.R. § 413.30(e)(2). This, then, permits the Secretary, under some circumstances to deny the exemption by tying together present and previous ownership.

Although this phraseology makes previous ownership an important datum, the regulation does not dictate how previous ownership determinations should be made. The Secretary has interpreted this phrase, more majorum, by reference to Part I of HCFA's Provider Reimbursement Manual (the Manual). Pertinently, the Manual has long defined "change of ownership" as including the sale of "all or some portion of a provider's facility or assets (used to render patient care)," so long as such sale "affects licensure or certification of the provider entity." PRM-1 § 1500.7 (1976). The Manual eventually integrated change of ownership, so defined, into determinations of previous ownership and, ultimately, into the definition of new provider. See id. § 2533.1.E.1.b (1997). It warns, however, that "[t]he mere existence of a [change of ownership] does not in itself make an institution or institutional complex eligible for a new provider exemption." Id. § 2533.1.E. Rather, the Secretary conducts a comparison of the operations conducted by the previous and current owners in order to decide whether the current owner qualifies. Equivalency plays an important role in this comparison, for, generally speaking, previous ownership will not be carried forward unless, at a bare minimum, the previous owner's operations and the current owner's operations are deemed equivalent.

II. PROCEDURAL BACKGROUND

The Hospital began to plan for the TCC in 1992, with an eye toward supplementing its existing continuum of care. But there was a rub: Massachusetts, like many states, titrates the provision of health care by requiring various types of facilities to secure determinations of need as a prerequisite to offering covered services.³ See Mass. Gen. Laws ch. 111, § 25C; Mass. Regs.Code tit. 105, § 100.532. Because Massachusetts had placed a moratorium on the issuance of DON rights for skilled nursing beds, the Hospital's plans were stymied until it arranged to purchase the necessary DON rights from Prospect Hill Manor Nursing Home (Prospect Hill), a facility that had gone into receivership in March 1993. No other transfers of property, patient records, or assets accompanied the purchase, and the entity known as Prospect Hill vanished shortly after transferring the DON rights.

The Commonwealth of Massachusetts approved the transfer of DON rights on condition that the Hospital assume liability for any and all Medicaid overpayments to Prospect Hill. Subsequently, it approved a phantom "relocation" of Prospect Hill to the Hospital's campus. Armed with these approvals, the TCC opened its doors in January of 1995.

On May 17, 1995, the Hospital petitioned HCFA to classify its nascent TCC as a new provider. The Hospital's continuing interest in the exemption is easily grasped: in 1995 — its first full year of operation — the TCC's routine service costs exceeded the applicable RCLs by almost $900,000. And when Congress replaced Medicare's existing cost-based reimbursement system with a prospective payment system that looked to a facility's 1995 reimbursement levels as a basis for setting future rates, see Balanced Budget Act of 1997, Pub.L. No. 105-33, § 4432(a), 111 Stat. 251, 422 (codified as amended at 42 U.S.C § 1395yy(e)(3)(A)(ii)), the lure of the new provider exemption became irresistible.

In due course, HCFA rejected the Hospital's application on the ground that the conveyance of DON rights required that Prospect Hill's previous operations be imputed to the TCC. Following an evidentiary hearing, the Board affirmed this determination. S. Shore I, supra, at *18. In so holding, the Board found that, in the circumstances of this case, the transferred DON rights were a sufficient basis for imputation of previous ownership to the purchaser and that Prospect Hill and the TCC were equivalent providers. Id. at *16-*17. In regard to equivalency the Board acknowledged that Prospect Hill had not furnished the same level of nursing care that characterized the operations of the TCC, but none-the-less concluded that Prospect Hill had been operating as an SNF during the three years prior to the conveyance. Id. at *17. The Secretary declined to intervene, thus making the Board's decision administratively final. 42 U.S.C. § 139500(f)(1).

The Hospital petitioned for judicial review. See id. The district court reversed, declaring that the TCC was a new provider in every relevant sense and that the Board could not reasonably have ruled otherwise. S. Shore II, 204 F.Supp.2d at 82. Accordingly, the court remanded the matter to the Board for a determination of what level of reimbursement the TCC, as a new provider, should receive. Id. at 83. This appeal followed.

III. STANDARD OF REVIEW

An inquiring court can set aside an agency's adjudicatory decisions only if those decisions are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," 5 U.S.C. § 706(2)(A), or "unsupported by substantial evidence in the administrative record," id. § 706(2)(E). This standard tightly circumscribes judicial review. See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415-16, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971); Henry v. INS, 74 F.3d 1, 4 (1st Cir.1996).

Here, there is a further gloss on this familiar formulation. Where Congress has entrusted rulemaking and administrative authority to an agency, courts normally accord the agency particular deference in respect to the interpretation of regulations promulgated under that authority. Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414, 65 S.Ct. 1215, 89 L.Ed. 1700 (1945); Johnson v. Watts Regulator Co., 63 F.3d 1129, 1134-35 (1st Cir.1995). Courts withhold such deference only...