St. Francis Health Care v. Shalala

• Decision Date: 25 October 1999
• Docket Number: DEFENDANT-APPELLEE,PLAINTIFF-APPELLAN,V,No. 98-3965,98-3965
• Citation: 205 F.3d 937
• Parties: (6th Cir. 2000) ST. FRANCIS HEALTH CARE CENTRE,DONNA SHALALA, Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 937

205 F.3d 937 (6th Cir. 2000)

ST. FRANCIS HEALTH CARE CENTRE, PLAINTIFF-APPELLANT,

V.

DONNA SHALALA, DEFENDANT-APPELLEE.

No. 98-3965

U.S. Court of Appeals, Sixth Circuit

Argued: October 25, 1999

Decided and Filed: February 25, 2000

Appeal from the United States District Court for the Northern District of Ohio at Toledo. No. 97-07559--David A. Katz, District Judge.

Jenifer A. Belt (briefed), Dennis P. Witherell (argued and briefed), Shumaker, Loop & Kendrick, Toledo, Ohio, for Plaintiff-Appellant.

Thomas C. Fox, Gina M. Cavalier, Reed Smith, Shaw, & McClay, Washington, DC, for Amicus Curiae.

Holly Taft Sydlow, Office of the U.S. Attorney, Western Division, Toledo, Ohio, Ted Yasuda (argued and briefed), U.S. Department of Health & Human Services, Office of the General Counsel, Region V, Chicago, Illinois, for Defendant-Appellee.

Before: Jones, Moore, and Gilman, Circuit Judges.

JONES, J., delivered the opinion of the court, in which MOORE, J., joined. GILMAN, J. (pp. 948-951), delivered a separate dissenting opinion.

OPINION

Nathaniel R. Jones, Circuit Judge.

Plaintiff-Appellant St. Francis Health Care Centre ("St. Francis") appeals the district court's grant of summary judgment for Defendant-Appellee Donna Shalala, Secretary of the Department of Health and Human Services ("Secretary"). St. Francis contends that the Secretary erred in denying its request for Medicare reimbursement for the provision of hospital-based skilled nursing services. For the reasons stated herein, we AFFIRM.

I.

A.

St. Francis operates a rehabilitation hospital, a hospital-based skilled nursing facility ("HB-SNF"), a general nursing facility, and a transitional living center in rural Ohio. Only St. Francis's HB-SNF is relevant for purposes of this appeal. The goal of St. Francis's HB-SNF is to rehabilitate, rather than simply maintain patients. Thus, St. Francis routinely provides "comprehensive rehabilitation therapy" for the vast majority of its patients. Although St. Francis's intensive rehabilitation therapy results in higher per diem costs per patient compared to its peers, this therapy also results in shorter patient stays. Thus, a patient's total costs are less than they would be at other facilities.

Like many health care facilities, a number of St. Francis's patients are Medicare recipients. Consequently, Medicare reimburses St. Francis for the reasonable costs of services provided to Medicare patients.¹ See 42 U.S.C. § 1395x(u) & (v)(1)(A). Pursuant to Medicare rules and regulations, from 1983 to 1990, St. Francis was reimbursed for such reasonable actual costs of services provided. Because St. Francis's actual costs exceeded the statutory routine cost limits ("RCLs") for each of these years, St. Francis requested, and was granted, an "upward adjustment" to its cost limits. However, in the 1991 and 1992 cost reporting periods, the Medicare intermediary denied St. Francis's requests for an "upward adjustment."² St. Francis appealed to the Provider Reimbursement Review Board ("PRRB"), which reversed the intermediary's decision. Thereafter, the Administrator of the Health Care Financing Administration ("HCFA"), the Secretary's delegate, reviewed and reversed the PRRB's decision. Pursuant to 42 U.S.C. § 1395oo(f)(1), St. Francis thereafter filed a Complaint in federal district court seeking review of the HCFA's decision. St. Francis and the Secretary filed cross motions for summary judgment. The district court denied St. Francis's motion, and granted the Secretary's motion. See St. Francis Health Care Centre v. Shalala, 10 F.Supp.2d 887 (N.D. Ohio 1998). This timely appeal ensued.

B.

The Medicare reimbursement plan developed by Congress has been refined over the years by Congress and the Secretary. Beginning in 1972, Congress, faced with rising Medicare costs, recognized that the original cost-based Medicare payment structure provided little incentive for providers to operate efficiently. Congress amended the Medicare Act to provide that "reasonable costs" reimbursable under Medicare should exclude "any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." 42 U.S.C. § 1395x(v)(1)(A).

The original cost limits which HCFA established categorized SNFs as free-standing or hospital-based and as urban or rural, and permitted reimbursement for SNFs for up to 115% of the mean cost of their respective category, or "peer group." HCFA subsequently reduced the cost limit to 112% of the peer group mean costs. Therefore, while each facility was entitled to receive 112% of its peer group mean costs, the four types had different peer group means, and therefore each type of facility had a different cost limit. The cost limits for HB-SNFs were significantly higher than for free-standing SNFs (FS-SNFs). Advocates of separate cost limits argued that HB-SNFs incurred higher costs because of the more intensive care they rendered, justifying higher cost limits. However, opponents argued that all SNFs provide the same standard of care and separate cost limits were not warranted.

Congress, aware of results from several studies of the higher HB-SNF costs,³ enacted the Deficit Reduction Act (DEFRA), Pub. L. 98-369, § 2319(b), 98 Stat. 494 (1984). DEFRA added a new section to the Medicare Act which addressed the cost differences between HB- and FS-SNFs by adjusting the cost limits for the two groups. For HB-SNFs, instead of employing the previous 112% level (112% of the mean per diem costs of the peer group), Congress lowered that amount by 50% of the difference between the 112% level for HB-SNFs and FS-SNFs. (ie., 50% ((112% x HB-SNF per diem costs) - (112% x FS-SNF per diem costs))). Still dissatisfied with the cost limits established by DEFRA, Congress has since enacted measures to contain costs further and to reduce the differing treatment of HB- and FS-SNFs; these latter changes post-date the events of this case, however.⁴ Despite this plethora of changes to the medicare reimbursement plan, Congress has always left intact the Secretary's authority to make adjustments to cost limits "to the extent the Secretary deems appropriate." 42 U.S.C. § 1395yy(c).

C.

With this legislative history in the background, this case involves a Medicare Act provision (42 U.S.C. § 1395yy(a)), a regulation interpreting that provision (42 C.F.R. § 413.30), and a PRM provision (PRM § 2534.5) interpreting the regulation.

1. 42 U.S.C. § 1395yy: The Statutory Framework for Cost Limits

Congress established the RCLs to be applied to different SNFs in 42 U.S.C. § 1395yy:

The Secretary, in determining the amount of the payments which may be made under this subchapter with respect to routine service costs of extended care services shall not recognize as reasonable (in the efficient delivery of health services) per diem costs of such services to the extent that such per diem costs exceed the following per diem limits....

42 U.S.C. § 1395yy(a). The provision then establishes that the RCL for FS-SNFs "shall be equal to" 112% of the "mean per diem routine service costs" of FS-SNFs. Id. at § 1395yy(a)(1). For HB-SNFs, the RCL "shall be equal to" the sum of the following: the FS-SNFs cost limit plus 50% of the amount by which 112% percent of the HB-SNFs mean per diem routine service cost exceeds the FS-SNFs cost limit. Id. at § 1395yy(a)(3). Despite these statutory limits, Congress, recognizing the Secretary's expertise in this area, afforded the Secretary the discretion to make "upward adjustments" to these statutory RCLs:

The Secretary may make adjustments in the limits set forth in subsection (a) of this section with respect to any skilled nursing facility [SNF] to the extent the Secretary deems appropriate, based upon case mix or circumstances beyond the control of the facility. The Secretary shall publish the data and criteria to be used for purposes of this subsection on an annual basis. 42 U.S.C. § 1395yy(c).

2. 42 C.F.R. § 413.30: The Secretary's Regulation for Adjusting Cost Limits

Pursuant to the discretion Congress afforded the Secretary in 42 U.S.C. § 1395yy(c), the Secretary implemented 42 C.F.R. § 413.30, which "set[s] forth the general rules under which HCFA may establish limits on provider costs recognized as reasonable in determining Medicare program payments" and "also sets forth rules governing exemptions, exceptions, and adjustments to limits established under this section that HCFA may make as appropriate in consideration of special needs or situations of particular providers." Id. at § 413.30(a). The regulation provides as follows:

(a)(2) General principle. Reimbursable provider costs may not exceed the costs estimated by HCFA to be necessary for the efficient delivery of needed health services. HCFA may establish estimated cost limits for direct or indirect overall costs or for costs of specific items or services or groups of items or services. These limits will be imposed prospectively and may be calculated on a per beneficiary, per admission, per discharge, per diem, per visit, or other basis.

(f) Exceptions. Limits established under this section may be adjusted upward for a provider under the circumstances specified in paragraphs (f)(1) through (f)(5) of this section. An adjustment is made only to the extent the costs are reasonable, attributable to the circumstances specified, separately identified by the provider, and verified by the intermediary.

(1) Atypical services. The provider can show that the

(i) Actual cost of items or services furnished by a provider exceeds the applicable limit because such items or services are atypical in nature and scope, compared to the items or services generally furnished by providers similarly classified; and

(ii) Atypical items or services are furnished because of the special needs of the patients treated and are necessary in the efficient delivery of needed health care.

42 C.F.R. § 413.30 (emphasis added).

3. PRM⁵ § 2534.5

a. The...