Southeast Alabama Medical Center v. Sebelius

• Citation: 572 F.3d 912
• Decision Date: 17 July 2009
• Docket Number: No. 08-5156.,08-5156.
• Parties: SOUTHEAST ALABAMA MEDICAL CENTER, et al., Appellants v. Kathleen SEBELIUS, Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (District of Columbia)

572 F.3d 912

SOUTHEAST ALABAMA MEDICAL CENTER, et al., Appellants v. Kathleen SEBELIUS, Appellee.

No. 08-5156.

United States Court of Appeals, District of Columbia Circuit.

Argued January 14, 2009.

Decided July 17, 2009.

Appeal from the United States District Court for the District of Columbia (No. 1:04-cv-01143).

James F. Segroves argued the cause for appellants. With him on the briefs was Malcolm J. Harkins III.

Henry C. Whitaker, Attorney, U.S. Department of Justice, argued the cause for appellee. With him on the brief were Gregory G. Katsas, Assistant Attorney General, Jeffrey A. Taylor, U.S. Attorney, and Mark B. Stern, Attorney. R. Craig Lawrence, Assistant U.S. Attorney, entered an appearance.

Before: HENDERSON, TATEL, and GARLAND, Circuit Judges.

Opinion for the Court filed by Circuit Judge GARLAND.

GARLAND, Circuit Judge:

Appellants are 113 inpatient hospitals located in Alabama, Louisiana, and Mississippi. They contend that the Department of Health and Human Services (HHS) interpreted the Medicare reimbursement statute in a way that improperly deprived them of millions of dollars. The district court disagreed and granted summary judgment for the Department. We affirm the district court's judgment in all but one respect.

I

In 1983, Congress revised the Medicare reimbursement statute to move from a "reasonable cost" method of retrospective compensation to the Prospective Payment System (PPS). Social Security Amendments of 1983, Pub.L. No. 98-21, § 601, 97 Stat. 65, 149; see Transitional Hosps. Corp. of La. v. Shalala, 222 F.3d 1019, 1021 (D.C.Cir.2000); County of Los Angeles v. Shalala, 192 F.3d 1005, 1008-09 (D.C.Cir.1999). Under this system, HHS reimburses hospitals that provide inpatient care to eligible beneficiaries according to a preestablished formula, regardless of the actual costs incurred. 42 U.S.C. § 1395ww(d). The payment rates are tied to the national average cost of treating a patient in a particular "diagnosis-related group" (DRG). Id. The statute mandates that HHS adjust the standardized payment rates for area differences in hospital costs, id. § 1395ww(d)(3)(E), which HHS accomplishes through annual notice-and-comment rulemaking. This case concerns the methodology that HHS used to make these geographic adjustments in fiscal years (FY) 2003 and 2004.

During those years, the relevant statutory section, 42 U.S.C. § 1395ww(d)(3)(E), provided in relevant part:

The Secretary shall adjust the proportion, (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs, of the DRG prospective payment rates computed under subparagraph (D) for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level. Not later than October 1, 1990, and October 1, 1993 (and at least every 12 months thereafter), the Secretary shall update the factor under the preceding sentence on the basis of a survey conducted by the Secretary (and updated as appropriate) of the wages and wage-related costs of subsection (d) hospitals in the United States. Not less often than once every 3 years the Secretary (through such survey or otherwise) shall measure the earnings and paid hours of employment by occupational category and shall exclude data with respect to the wages and wage-related costs incurred in furnishing skilled nursing facility services.

42 U.S.C. § 1395ww(d)(3)(E) (2000) (emphases added).¹ HHS has traditionally referred to the "proportion" described in § 1395ww(d)(3)(E)'s first sentence as the "labor-related share," and has referred to the "factor" described in the first two sentences as the "wage index." Following the district court, we will instead refer to these constructs by their statutory names and will capitalize "Proportion" and "Factor" for purposes of clarity. The measurement of "the earnings and paid hours of employment by occupational category" described in the third sentence of § 1395ww(d)(3)(E) has traditionally been known as the "occupational mix," a term we will retain.

Although § 1395ww(d)(3)(E) is hardly a paragon of clarity, the bottom line is as follows: The statute first requires HHS to determine the Proportion of the DRG reimbursement that is attributable to wages and wage-related costs. HHS must then adjust that Proportion by a Factor reflecting the relative hospital wage level in the hospital's geographic area as compared to the national average hospital wage level; the rest of the reimbursement amount— the share not attributable to wages or wage-related costs—is not adjusted. In addition, HHS must adjust the Factor itself for occupational mix. But see infra Part II.C (explaining that this last requirement is not applicable to the fiscal years at issue on this appeal).

For FY 2003 and 2004, HHS determined the Proportion to be 71.066 percent.² The Factor varied significantly across geographic areas, ranging in FY 2004 from a high of 1.51 in the Oakland, California area to a low of 0.42 in northwest Puerto Rico.³ As the mathematics worked out, hospitals in geographic areas with Factors less than 1—i.e., hospitals in low-wage regions— wanted the Proportion to be as low as possible, whereas hospitals in areas with Factors greater than 1 wanted the Proportion to be as high as possible. In addition, every hospital wanted its own area's Factor to be as high as possible. The hospitals bringing this case are all from areas that were assigned Factors less than 1.⁴

The appellant hospitals challenged HHS's final rules for FY 2003 and 2004 before the Department's Provider Reimbursement Review Board, see 42 U.S.C. § 1395oo(b), which granted their request for expedited judicial review in the United States District Court for the District of Columbia, see 42 U.S.C. § 1395oo(f)(1). The hospitals raised four main arguments before the district court. First, they contended that during the fiscal years in question, HHS violated § 1395ww(d)(3)(E) by including in the Proportion hospital expenses that were not "attributable to wages and wage-related costs" and that did not vary on a local basis. Second, they argued that the Department's decision to include certain cost items in the Proportion but not in the Factor violated the plain language of the statute and was arbitrary and capricious. Third, they argued that HHS also violated the statute and acted arbitrarily and capriciously by failing to adjust the Factor for occupational mix. Finally, they maintained that HHS violated the statute by failing to account for interstate employment when calculating the Factor.

The district court rejected all of these arguments and granted summary judgment for the government. Se. Ala. Med. Ctr. v. Leavitt, 539 F.Supp.2d 352 (D.D.C. 2008). The court found that HHS's interpretation of "wages and wage-related costs" in the Proportion was consistent with the words' ordinary meaning, id. at 357-58; that the statute permitted HHS to use different cost items in the Proportion as compared to the Factor, id. at 359; that there was "no basis on [the] record on which to conclude that the Secretary's choice to not collect [data on occupational mix] in time ... to be applied in [FY 2003 and 2004] was unambiguously forbidden by the statute" or otherwise unreasonable, id.; and that the hospitals' failure to raise their interstate employment argument before the Provider Reimbursement Review Board barred them from raising it in court, id. at 360.

The hospitals now appeal, making the same four arguments. We address each of them below. We note, however, that although resolution of these arguments has financial significance for the appellants' FY 2003 and 2004 claims, the significance of the arguments for any subsequent-year claims is extremely limited. See Oral Arg. Recording at 7:57-8:05 (acknowledgment by counsel for appellants that their primary arguments in this case "do not affect [them] for the future"). The import of the first two arguments was greatly diminished if not negated by a statutory amendment, effective in FY 2005, which directs HHS to "substitute '62 percent' for the [P]roportion" unless doing so "would result in lower payments to a hospital than would otherwise be made." Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub.L. No. 108-173, § 403(a)(1), 117 Stat.2066, 2265 (codified at 42 U.S.C. § 1395ww(d)(3)(E)(ii)). And as explained in Part II.C below, appellants' third argument was mooted by statutory amendments to the provision regarding occupational mix.

II

In reviewing HHS's actions on appeal from the district court, this "court addresses the issue de novo, without deference to the decision of the district court." Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1229 (D.C.Cir.1994). We review the Department's interpretation of provisions of the Medicare statute under the two-step framework of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Under that framework, "[i]f the intent of Congress is clear, ... [a court] must give effect to the unambiguously expressed intent of Congress." Id. at 842-43, 104 S.Ct. 2778. But "if the statute is silent or ambiguous with respect to the specific issue," the court must uphold the agency's interpretation as long as it is reasonable. Id. at 843, 104 S.Ct. 2778. We review other aspects of HHS's actions under the Administrative Procedure Act (APA), pursuant to which we will uphold them unless they are "arbitrary, capricious an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A); see 42 U.S.C. § 1395oo(f)(1).

A

The hospitals' primary target on appeal is the Proportion—that is, "the proportion ... of hospitals' costs which are attributable to wages and wage-related costs." 42 U.S.C. § 1395ww(d)(3)(E). For the fiscal years...