St. Luke's Methodist Hosp. v. Thompson, C 00-13 MJM.

• Citation: 182 F.Supp.2d 765
• Decision Date: 26 September 2001
• Docket Number: No. C 00-13 MJM.,C 00-13 MJM.
• Parties: ST. LUKE'S METHODIST HOSPITAL, Plaintiff, v. Tommy G. THOMPSON,<SMALL><SUP>1</SUP></SMALL> Secretary of the United States Department of Health and Human Services, Defendant.
• Court: U.S. District Court — Northern District of Iowa

182 F.Supp.2d 765

ST. LUKE'S METHODIST HOSPITAL, Plaintiff, v. Tommy G. THOMPSON,¹ Secretary of the United States Department of Health and Human Services, Defendant.

No. C 00-13 MJM.

United States District Court, N.D. Iowa, Cedar Rapids Division.

September 26, 2001.

COPYRIGHT MATERIAL OMITTED

Nancy J. Penner, Shuttleworth & Ingersoll, Cedar Rapids, IA, Frank P. Fedor, Anthony M. Perez, Murphy, Austin, Adams, Schoenfeld, LLP, Sacramento, CA, for Plaintiff.

Lawrence D. Kudej, Assistant United States Attorney, Cedar Rapids, IA, Michael R. Fry, Assistant Regional Counsel, Dept. of Health & Human Services, Office of General Counsel, Kansas City, MO, for Defendant.

OPINION and ORDER

MELLOY, District Judge.

Pursuant to 42 U.S.C. § 1395oo(f)(1), St. Luke's Methodist Hospital ("St. Luke's"), located in Cedar Rapids, Iowa, seeks judicial review of the final decision of the Secretary of Health and Human Services ("the Secretary") denying St. Luke's an exception to the cost limits applicable for Medicare skilled nursing facilities for the year 1992. Exception requests are governed by 42 C.F.R. § 413.30 which provides, in certain circumstances, for discretionary reimbursement of provider costs which exceed applicable cost limits. In prior years St. Luke's had established that it provided needed "atypical services" to Medicare patients, see 42 C.F.R. § 413.30(f)(1), and thus was granted reimbursement above the applicable limits for the reasonable "actual" costs of services provided. With regard to its exception request for 1992, St. Luke's relied upon the same criteria as in prior years to prove exception eligibility. This time, however, the request was denied on the basis of the Secretary's new interpretation of the regulation as articulated in his Provider Reimbursement Manual ("PRM") § 2534.5.

In this motion, St. Luke's asks the Court to hold that the Secretary's reinterpretation of 42 C.F.R. § 413.30, as embodied in PRM § 2534.5, is arbitrary, capricious, an abuse of discretion, or not in accordance with law. The relevant facts are undisputed and the parties agreed at oral argument to treat the matter as a cross-motion for summary judgment. For the reasons discussed herein, the court finds PRM § 2534.5 invalid as an unreasonable interpretation of 42 C.F.R. § 413.30 in light of the language of that regulation and the principles underlying the Medicare statute. Accordingly, St. Luke's motion shall be granted and the Secretary's denied.

I. Summary Judgment Standard

"Under Rule 56(c), summary judgment is proper `if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.'" Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (quoting Fed.R.Civ.Pro. 56); see also Krentz v. Robertson Fire Prot. Dist., 228 F.3d 897, 902 (8th Cir.2000). A court considering a motion for summary judgment must view all the facts in the light most favorable to the nonmoving party and give the nonmoving party the benefit of all reasonable inferences that can be drawn from those facts. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); see also Rabushka, ex rel. U.S. v. Crane Co., 122 F.3d 559, 562 (8th Cir.1997), cert. denied, 523 U.S. 1040, 118 S.Ct. 1336, 140 L.Ed.2d 498 (1998). Where the litigants concurrently pursue summary judgment, each motion must be evaluated independently to determine whether there exists a genuine dispute of material fact and whether the movant is entitled to judgment as a matter of law. See Wermager v. Cormorant Township Bd., 716 F.2d 1211 (8th Cir. 1983).

II. Summary of Facts and Relevant Legislation

With this action, St. Luke's is seeking reimbursement under 42 C.F.R. § 413.30 for costs incurred above the statutorily-delineated cost limit in providing atypical services to special needs Medicare patients through its hospital-based skilled nursing facility (HB-SNF). Resolution of St. Luke's case turns on one legal issue — the validity of PRM § 2534.5,² a newly-issued rule purporting to "interpret" and provide implementing details for 42 C.F.R. § 413.30. Prior to issuance of PRM § 2534.5, the applicable limit against which exception requests were measured was the routine cost limit (RCL) established by Congress and codified at 42 U.S.C. § 1395yy. After PRM § 2534.5, however, an HB-SNF such as St Luke's could be reimbursed for atypical costs only if its total costs exceed 112% of the peer group mean for HB-SNFs — a figure significantly higher than the RCL. Thus, in comparison to the Secretary's prior practice, PRM § 2534.5 effectively raised the threshold cost level which HB-SNFs had to exceed to establish exception eligibility. St. Luke's costs for 1992, although above the statutory RCL, did not exceed the new higher threshold figure — 112% of the peer group mean — and St. Luke's was, accordingly, not entitled to consideration for discretionary reimbursement under 42 C.F.R. § 413.30.

The validity of PRM § 2534.5 must be determined against the backdrop of the Medicare Act and its implementing regulations. Therefore, for the sake of clarity, the Court will include a rather detailed summary of the substance and chronology of the Act's relevant provisions as drawn from the record and the parties' briefs.

A. Medicare program reimbursement

1. Reimbursement for the "reasonable cost" of covered services:

The Medicare program reimburses skilled nursing facilities, both hospitalbased (HB-SNF) and freestanding (FS-SNF), for the "reasonable cost" of covered services provided to Medicare program beneficiaries. 42 U.S.C. § 1395x(v)(1)(A). "Reasonable cost" is defined as only those costs "actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." Id. Per the statute, the reasonable cost shall be determined:

in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs for various types or classes of institutions, agencies, and services.... Such regulations ... may provide for ... the use of estimates of costs of particular items or services, may provide for the establishment of limits on the direct or indirect overall incurred costs or incurred costs of specific items or services or groups of items or services to be recognized as reasonable based on estimates of the costs necessary in the efficient delivery of needed health services to individuals covered by the insurance programs established under this subchapter, and may provide for the use of charges or a percentage of charges where this method reasonably reflects the costs.

Id.

The statute further prohibits Medicare and other payors from "cross-subsidizing" each other, stating that

[s]uch regulations shall ... take into account both direct and indirect costs of providers of services (excluding therefrom any such costs, including standby costs, which are determined in accordance with regulations to be unnecessary in the efficient delivery of services covered by the insurance programs established under this subchapter) in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this subchapter will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs....

Id. This "no cross-subsidization" principle is reiterated in 42 C.F.R. § 413.5(a) and (b)(3), and 42 C.F.R. § 413.50.

2. Routine cost limits established by regulation:

Routine service costs are subject to Routine Cost Limits ("RCLs"). Before 1984, the RCL for FS-SNFs was set at 112 percent of the peer group mean for FS-SNFs and the RCL for HB-SNFs was set at 112 percent of the peer group mean for HB-SNFs.³ The RCL for HB-SNFs was higher than that for FS-SNFS.⁴ In 1985, the Health Care Financing Administration ("HCFA"), in a report to Congress, stated that, after reviewing several external studies on the issue, it was the HCFA's position that approximately 50 percent of the reported cost differences between HB-SNFs and FS-SNFs were attributable to variations in intensity of care or casemix. The remaining cost differences were deemed unassociated with a wide range of control variables. The parties dispute, and the record is inconclusive, as to whether the underlying data support the Secretary's current position that inefficiency was therefore the likely cause of the other 50 percent variance.⁵

3. Exceptions to cost limits permitted by regulation:

Congress authorized the Secretary to grant exceptions to the RCLs under 42 C.F.R. § 413.30(f)(1).⁶ This regulation provides for the granting of exceptions from the RCL for SNFs which provide atypical services as therein defined. It reads, in part, as follows:

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

(1) Atypical services. The SNF ... can show that the —

(i) Actual cost of services furnished by a SNF ... exceeds the applicable limit because the services are atypical in nature and scope, compared to the services generally furnished by SNFs ... similarly classified; and

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

The substance of 42 C.F.R. § 413.30(f)(1) was first issued as a regulation...