St. Luke's Hosp. v. Thompson

Decision Date30 January 2004
Docket NumberNo. 02-5350.,02-5350.
Citation355 F.3d 690
PartiesST. LUKE'S HOSPITAL, Appellant, v. Tommy G. THOMPSON, Secretary of Health and Human Services, Appellee.
CourtU.S. Court of Appeals — District of Columbia Circuit

Appeal from the United States District Court for the District of Columbia (No. 00cv01884).

Leslie Demaree Goldsmith argued the cause for appellant. With her on the briefs was Harry R. Silver.

Paul E. Soeffing, Attorney, U.S. Department of Health and Human Services, argued the cause for appellee. With him on the brief were Peter D. Keisler, Assistant Attorney General; Roscoe C. Howard Jr., U.S. Attorney; Anthony J. Steinmeyer, Attorney, U.S. Department of Justice; Alex M. Azar II, General Counsel, U.S. Department of Health and Human Services; Robert P. Jaye, Acting Associate General Counsel; and Henry R. Goldberg, Deputy Associate General Counsel for Litigation.

Before: SENTELLE, ROGERS, and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge:

A Pennsylvania hospital that treats patients with renal disease asked the Secretary of Health and Human Services to increase the rate at which the Medicare program would reimburse it for each treatment. After discovering an error in the hospital's supporting documentation, the Secretary denied the request, and the district court rejected the hospital's challenge to that ruling. Finding the Secretary's conclusion that the error left the hospital unable to carry its burden of justifying a rate increase neither arbitrary nor capricious, we affirm.


Each year, the Secretary of Health and Human Services establishes a prospective "composite rate" for various outpatient treatments of end-stage renal disease (ESRD). See 48 Fed.Reg. 21,254 (May 11, 1983); see also 42 U.S.C. § 1395rr(b) (2000) (requiring such action by the Secretary). The composite rate, which represents the approximate per-treatment cost that the Secretary expects health-care providers to incur for various ESRD treatments, encourages efficiency, for if a provider's per-treatment cost falls below the composite rate, then the difference represents a profit to the provider. At the same time, the composite rate does not establish an absolute ceiling; providers that experience per-treatment costs above the composite rate may ask the Secretary for an "exception." 42 U.S.C. § 1395rr(b)(7). A provider seeking an exception must "demonstrate[] with convincing objective evidence that its total per treatment costs are reasonable and allowable..., and that its per treatment costs in excess of its payment rate are directly attributable to any of the [listed] criteria." 42 C.F.R. § 413.170(g) (1993). "Atypical service intensity (patient mix)" tops the list of criteria. Id.

Pursuant to HHS's Provider Reimbursement Manual (PRM)"a compilation of interpretive rules published by [HHS]," Appellee's Br. at 5 n.5 — providers must submit exception requests during 180-day periods that the Secretary designates from time to time (or within 180 days of other events not relevant here). PRM § 2720.2 (1993). Providers submit requests to their "fiscal intermediaries," i.e., private organizations such as insurance companies. Id. § 2720. Intermediaries have fifteen working days to review requests and forward them to HHS with their recommendations. Id. § 2723. The HHS division responsible for initially reviewing exception requests, the Centers for Medicare & Medicaid Services (CMS), has sixty working days in which to deny requests, or they are automatically approved. 42 U.S.C. § 1395rr(b)(7). Because this sixty-day period includes the fifteen days that intermediaries have to review applications, CMS actually has only forty-five working days in which to complete its review.

Located in Bethlehem, Pennsylvania, appellant St. Luke's Hospital applied for an exception to the prevailing ESRD composite rate, seeking reimbursement at a rate of $174.41 per treatment — $46.43 above the composite rate of $127.98. St. Luke's based its request on its asserted "atypical service intensity," claiming that it had to spend an abnormally high amount of money on staff salaries because the population it served was both atypically old and unusually likely to suffer from acute conditions requiring intensive treatment. St. Luke's submitted its request on the last day of the relevant 180-day period.

After reviewing the hospital's request, the fiscal intermediary forwarded it to CMS with a recommendation that it be approved. CMS denied the request, however, citing two problems: (1) St. Luke's failed to explain why its per-treatment cost for hemodialysis maintenance increased nineteen percent between 1992 and 1993, and (2) it provided no explanation for why the number of hours that its nurses and technicians worked tripled between 1993 and 1994. Because of these deficiencies, CMS concluded that St. Luke's failed to present, as HHS regulations require, "convincing objective evidence" showing not only that it met the listed criterion (atypical patient mix), but also that this atypical mix caused the hospital's unusually high per-treatment costs. See 42 C.F.R. § 413.170(g).

St. Luke's appealed CMS's denial to the Provider Reimbursement Review Board (PRRB), the HHS division responsible for reviewing CMS decisions. See 42 U.S.C. § 1395oo(a) (2000). Reversing CMS's denial and granting the hospital's requested exception, the PRRB ruled first that CMS had improperly cited PRM section 2725.3E, which applies only when a facility seeks an exception based on its status as an "isolated essential facility." St. Luke's made no claim to be such a facility. As to the tripling of nurse and technician hours, the PRRB stated that the hospital's request contained an "obvious" error: for each of three categories of workers — registered nurses, licensed practical nurses, and technicians — St. Luke's reported the combined number of hours for all three categories. Although the three groups of workers actually worked a combined total of 37,983 hours during the relevant year, St. Luke's gave that number for each category, making the total for the three categories appear three times the actual figure and roughly three times what it had been in other years. The PRRB concluded that because the correct data appeared elsewhere in the hospital's 690-page request and were thus available to CMS, the agency erred in failing to conduct "further review of the obvious error." St. Luke's Hosp. v. Blue Cross & Blue Shield Ass'n, PRRB Hearing Dec. No.2000-D42, [2001-1 Transfer Binder] Medicare & Medicaid Guide (CCH) ¶ 80,432, at 14 (Apr. 4, 2000), reprinted in J.A. A70, A83. CMS must, the PRRB stated, "properly review all information submitted. Observance of an obvious error and not responding to it is patently wrong and unfair to this Provider." Id.

The CMS Administrator, pursuant to statutory authority, see 42 U.S.C. § 1395oo(f)(1), decided on his own motion to review the PRRB's decision, which he reversed. According to the Administrator, even if CMS had conducted further review of the hospital's "obvious" error, it would have been unable to resolve the problem because contrary to the PRRB's contention, the hospital's exception request nowhere contained the correct number of total hours. The request contained only the total number of nurses and technicians. Although St. Luke's suggested that CMS could have obtained the hourly figures by multiplying the employee totals by 2080 — the number of hours that HHS regulations assume full-time employees work per year — the Administrator pointed out that even if CMS had done this extra work, there would have been an unexplained discrepancy of approximately 2000 hours between the 1993 figures and the projected 1994 figures. In any event, the Administrator ruled, CMS has no duty to perfect exception requests. HHS regulations "make unequivocally clear that the Provider bears the burden of proving to [CMS's] satisfaction" that it deserves an exception. St. Luke's Hosp. v. Blue Cross & Blue Shield Ass'n, HCFA Adm'r Dec., [2000-2 Transfer Binder] Medicare & Medicaid Guide (CCH) ¶ 80,534, at 11 (June 2, 2002), reprinted in J.A. A27. The Administrator also pointed out that although CMS normally would have given St. Luke's a chance to submit additional information, it did not do so because the hospital submitted its exception request on the last day of the 180-day window, meaning that it could not have provided additional data before the window closed. Id.; see also PRM § 2723.3A (stating that a request for supplemental information does not extend the original 180-day window).

St. Luke's challenged the Administrator's decision, which represented the Secretary's final determination, in the United States District Court for the District of Columbia. See 42 U.S.C. § 1395oo(f)(1) (providing for such review). Granting summary judgment for the Secretary, the district court analyzed the case much as the CMS Administrator had, although unlike the Administrator the court addressed CMS's improper reliance on the PRM section that applies only to isolated facility exceptions. Deeming the citation to this section a "typographical error," the court concluded that it did not "transform[] the plaintiff[']s deficient request into something else." St. Luke's Hosp. v. Thompson, 224 F.Supp.2d 1, 10 (D.D.C.2002).

St. Luke's now appeals. "Because the district court entered a summary judgment, we review its decision de novo and therefore, in effect, review directly the decision of the Secretary." Lozowski v. Mineta, 292 F.3d 840, 845 (D.C.Cir.2002). Employing familiar APA standards, we will set aside the Secretary's decision only if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A) (2000); see also 42 U.S.C. § 1395oo(f)(1) (providing that the APA standard applies in cases involving denials of exception requests).


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