St. Mary Med. Ctr. v. Becerra

Decision Date20 January 2022
Docket NumberCivil Action No. 17-1073 (FYP)
Citation581 F.Supp.3d 119
Parties ST. MARY MEDICAL CENTER, et al., Plaintiffs, v. Xavier BECERRA, Defendant.
CourtU.S. District Court — District of Columbia

Ronald S. Connelly, Powers, Pyles, Sutter & Verville, Washington, DC, for Plaintiffs.

James O. Bickford, U.S. Department of Justice, Civil Division, Washington, DC, Lisa Zeidner Marcus, U.S. Department of Justice, Civil Division, Pittsburgh, PA, for Defendant.


Florence Y. Pan, United States District Judge

Plaintiffs are California hospitals that receive payments from the federal government to treat patients who are on Medicare. The hospitals bring this suit to challenge the Secretary of Health and Human Services’ interpretation of Section 4410 of the Balanced Budget Act of 1997 — an interpretation that lowered Plaintiffs’ Medicare payments in fiscal years 2009 and 2010. Section 4410 requires the Secretary to apply an adjustment that increased the Plaintiff hospitals’ Medicare payments — the so-called "rural-floor adjustment;" but the Secretary then decreased the payments by applying a corresponding "budget-neutrality" provision. Plaintiffs contend that their Medicare payments should not have been decreased under the budget-neutrality provision. They assert that the Secretary's interpretation of that provision violates the plain language of the statute and is unreasonable; and that the regulations adopted by the Secretary to determine the hospitals’ payments in 2009 and 2010 violate the Administrative Procedure Act, see 5 U.S.C. § 500 et seq. Before the Court are the parties’ dueling motions for summary judgment. For the reasons set forth below, the Court will deny PlaintiffsMotion for Summary Judgment and will grant Defendant's Cross Motion for Summary Judgment.1

I. Statutory Framework
A. Medicare and the Wage Index

Medicare is a federal health insurance program for the elderly and disabled. See 42 U.S.C. § 1395 et seq. It is administered by the Centers for Medicare & Medicaid Services ("CMS") within the Department of Health and Human Services ("HHS"). Medicare Part A "covers medical services furnished by hospitals and other institutional care providers." Ne. Hosp. Corp. v. Sebelius , 657 F.3d 1, 2 (D.C. Cir. 2011).

Under Part A, Medicare pays predetermined rates to most hospitals for treating patients admitted to their care, rather than paying the actual costs of the medical services provided. See 42 U.S.C. § 1395ww(d). This system of predetermined rates, which was established in 1983, is known as the Medicare hospital inpatient prospective payment system ("IPPS"). See Social Security Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat. 65, 149; see also Se. Ala. Med. Ctr. v. Sebelius , 572 F.3d 912, 914–15 (D.C. Cir. 2009) (describing IPPS); Transitional Hosps. Corp. of La. v. Shalala , 222 F.3d 1019, 1021–22 (D.C. Cir. 2000) (same).2

To calculate payments to hospitals under the IPPS, CMS follows three steps. The agency (1) constructs a standard nationwide cost rate, which roughly reflects the average cost incurred by hospitals nationwide for each patient they treat;3 (2) determines the proportion of that standardized amount attributable to wages and wage-related costs; and (3) multiplies that labor-related proportion by a wage index that adjusts for local hospital wages as compared to their federal benchmark. See Cape Cod Hosp. v. Sebelius , 630 F.3d 203, 205–06 (D.C. Cir. 2011) ; 42 C.F.R. § 412.64(g).

The second and third steps of this process reflect the requirement that the Secretary "adjust the ‘proportion’ of the payment attributable to ‘wages and wage-related costs’ for ‘area differences in hospital wage levels.’ " Anna Jacques Hosp. v. Burwell , 797 F.3d 1155, 1158 (D.C. Cir. 2015) (quoting 42 U.S.C. § 1395ww(d)(3)(E)(i) ). "To ensure uniformity in the adjustment process, the [Medicare] statute requires the Secretary to compute a ‘factor’ that ‘reflect[s] the relative hospital wage level in the geographic area of the hospital compared to the national average;’ " this factor is commonly referred to as the "wage index." Id. (quoting 42 U.S.C. § 1395ww(d)(3)(E)(i) ). In calculating each region's wage index, the Secretary divides the regional average hourly wage rate for hospitals in the defined geographic area by the national average hourly wage rate. Anna Jacques Hosp. , 797 F.3d at 1159 ; 42 C.F.R. § 412.64(h). "A wage index of 1.0 means a given area is average; an index above 1.0 indicates higher than average wage costs ... [;] and an index below 1.0 means a lower than average cost area." Dignity Health v. Price , 243 F. Supp. 3d 43, 46 (D.D.C. 2017). The wage index is applied as an adjustment to wage-related costs, altering the payments received by a hospital in a fiscal year. This method ensures that, for example, hospitals in Los Angeles, California, receive higher payments than hospitals in rural Kansas, to account for the comparatively more expensive labor market in urban California.

B. The Rural-Floor and the Budget-Neutrality Adjustment

Congress has made an exception to the general rule that each hospital's wage index is based on the prevailing wages in its own geographic area. In Section 4410(a) of the Balanced Budget Act of 1997, Congress included a provision that raises the wage index of urban hospitals with low wages to the same level as the wage index in rural areas of the same state:

[T]he area wage index applicable ... to any hospital which is not located in a rural area ... may not be less than the area wage index applicable under such section to hospitals located in rural areas in the State in which the hospital is located.

See Balanced Budget Act of 1997 ("BBA 1997"), Pub. L. No. 105-33, § 4410(a), 111 Stat. 251, 402. Known as the "rural floor," this provision guarantees that all hospitals in a state receive at least the wage index applicable to the rural hospitals in that state. See Cape Cod Hosp. , 630 F.3d at 206 ; FFY 2009 Final Rule, 73 Fed. Reg. 48,434, 48,570 (Aug. 19, 2008) ("Section 4410 ... established the rural floor by requiring that the wage index for a hospital in an urban area of a State cannot be less than the area wage index received by rural hospitals in that State.").

Concerned about the increased costs associated with applying the rural floor to raise Medicare payments to certain urban hospitals, Congress also enacted a budget-neutrality adjustment to offset the increased payments. See Cape Cod Hosp. , 630 F.3d at 206. Specifically, the budget-neutrality provision in Section 4410(b) of the 1997 Act states:

The Secretary of Health and Human Services shall adjust the area wage index referred to in subsection (a) for hospitals not described in such subsection in a manner which assures that the aggregate payments made ... in a fiscal year for the operating costs of inpatient hospital services are not greater or less than those which would have been made in the year if this section did not apply.

See BBA 1997 § 4410(b). Thus, taken as a whole, subsection (a) of Section 4410 increases Medicare payments to certain urban hospitals through application of the rural-floor adjustment; and subsection (b) of the statute decreases Medicare payments to other hospitals so that the rural-floor provision remains budget neutral.

To effectuate the requirements of Section 4410, the Secretary must calculate the wage indices for three categories of hospitals: (1) rural hospitals; (2) urban hospitals that do not receive the rural floor, i.e. , high-wage urban hospitals; and (3) urban hospitals that do receive the rural floor, i.e. , low-wage urban hospitals. The budget-neutrality provision requires a downward adjustment of payments to hospitals "not described" in subsection (a) to offset the rural-floor adjustments paid to low-wage urban hospitals. In applying that provision, the Secretary has defined hospitals "not described" in subsection (a) as rural hospitals and high-wage urban hospitals. See FFY 2008 Final Rule, 72 Fed. Reg. 47,130, 47,325 (Aug. 22, 2007). He has considered two ways to apply the cost of budget neutrality to those hospitals.

According to the Secretary, "[o]ne possible interpretation of section 4410(b) of the BBA is that the budget neutrality adjustment would be applied only to [the wage indices of] those hospitals that do not receive the rural floor," i.e. , rural hospitals and high-wage urban hospitals. Id. "In other words, the wage index of an urban hospital subject to the rural floor would be increased to the level of the rural wage index in the same State, but would not be adjusted for budget neutrality." Id. The Secretary expressed concern, however, that under this approach, "urban hospitals receiving the rural floor would receive a higher wage index than the rural hospitals within the same State (because rural floor hospitals would not be subject to budget neutrality, whereas rural hospitals would be)." Id. The Secretary concluded that "such a reading would not be in accordance with Congressional intent, which was to set a floor for urban hospitals, not to pay urban hospitals a wage index higher than the wage index applicable to rural hospitals." Id.

To better vindicate Congress's intent, the Secretary considered and adopted a second way to apply the statute, which "allow[s] an iterative calculation of budget neutrality and wage indices." Id. Under the iterative method, the Secretary first raises the wage indices of low-wage urban hospitals to match the rural hospitals for their geographic area, thereby applying the rural floor. Id. This results in an overall Medicare budget increase, which is prohibited by Section 4410(b); to maintain budget neutrality, the Secretary then applies an overall budget-neutrality downward adjustment to the wage indices of rural and high-wage urban hospitals. Id. At this point, the wage indices of low-wage urban hospitals are higher than the wage indices of rural hospitals, requiring the Secretary to reset the...

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