St. Joseph's Hosp. v. Heckler, CIV 82-781-TUC-MAR.

• Decision Date: 24 April 1984
• Docket Number: No. CIV 82-781-TUC-MAR.,CIV 82-781-TUC-MAR.
• Citation: 583 F. Supp. 1545
• Parties: ST. JOSEPH'S HOSPITAL, et al., Plaintiffs, v. Margaret M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants.
• Court: U.S. District Court — District of Arizona

583 F. Supp. 1545

ST. JOSEPH'S HOSPITAL, et al., Plaintiffs, v. Margaret M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants.

No. CIV 82-781-TUC-MAR.

United States District Court, D. Arizona.

April 24, 1984.

Shalom Brilliant, Dept. of Justice, Washington, D.C., Don V. Overall, Asst. U.S. Atty., D. Arizona, Tucson, Ariz., for defendants.

Robert Klein, Richard A. Jones, Weissburg & Aronson, Inc., Los Angeles, Cal., Richard Rollman, Tracy Nuckolls, Jones, Dickerman, Nuckkols, Edwards & Smith, Tucson, Ariz., Ronald N. Sutter, Weissburg & Aronson, Inc., Washington, D.C., for plaintiffs.

ORDER

MARQUEZ, District Judge.

Plaintiffs, hospitals, filed suit against HEW contesting the validity of the "Malpractice Rule," 42 C.F.R. § 405.452(b)(1)(ii), a recently adopted regulation which changes the formula by which hospitals are reimbursed for medical malpractice premiums by Medicare and Medicaid. Both plaintiffs and defendants have moved for summary judgment. After due consideration of the materials filed and oral argument, the motions come on now for decision.

Prior to the adoption of the Malpractice Rule, the percent Medicare reimbursed hospitals for malpractice premiums was gauged to the percent medicare patients made up the patient population at the hospital. Almost every hospital expense is reimbursed under this formula, from housekeeping to operating room expenses, as the government determined that by blending all expenses, some of which were used more by Medicare patients and some of which were used less, everything would balance out and Medicare would not be subsidizing private patients nor vice versa.

In 1976, the government commissioned a study of malpractice premiums to determine whether Medicare was picking up a disproportionately high percent. As a result, the Westat report was published that indicated Medicare patients received on the average 5.1 percent of the malpractice award dollars although Medicare paid a far greater percent of the premium costs based upon total hospital usage. Due to that report, the Malpractice Rule was promulgated which segregated out malpractice premiums to be apportioned between Medicare and private users by the actual loss claim history of the hospital and if there was none, based on the national average of 5.1 percent as determined by the Westat report.

Plaintiffs challenge the Malpractice Rule on three general grounds. This court, however, has found two arguments particularly persuasive and will discuss them in granting summary judgment for the plaintiffs.

Initially, plaintiffs argue the Malpractice Rule irrationally singles out malpractice costs on the basis of a rationale which is untrue and unsupported by the administrative record. This court must affirm the agency's decision to promulgate a regulation unless the party contesting the regulation can meet its burden of showing the rule was "arbitrary, capricious or an abuse of discretion." 5 U.S.C. § 706(2)(A), 42 U.S.C. § 139500(f). In applying this test the court must determine:

whether the decision was based on a consideration of the relevant factors and whether there has been a clear error in judgment. citations omitted. Although this inquiry into the facts is to be searching and careful, the ultimate standard of review is a narrow one. The court is not empowered to substitute its judgment for that of the agency.

Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 823, 28 L.Ed.2d 136 (1971). See Diplomat Lakewood, Inc. v. Harris, 613 F.2d 1009, 1018 (D.C.Cir.1979).

The challenged revision of the method of apportioning malpractice costs was based on HEW's conclusion that the old method of apportionment "resulted in Medicare paying a disproportionate amount of malpractice costs." 44 Fed.Reg. 31641. The basis for this conclusion was the Westat report.

The Westat report reviewed nine private insurance carriers out of 50 selected by the American Insurance Association and examined all claims closed by these companies from July 1, through October 1, 1976. Insureds from these nine companies were involved in 84 percent of all claims closed by private carriers in 1976. Although this figure sounds impressive, the authors of the report warned that "conclusions must be...