St. Mary's Hosp. of Rochester v. Leavitt, 03-3905.
| Decision Date | 28 July 2005 |
| Docket Number | No. 03-3905.,03-3905. |
| Citation | 416 F.3d 906 |
| Parties | ST. MARY'S HOSPITAL OF ROCHESTER, MINNESOTA; Rochester Methodist Hospital, Appellants, v. Michael O. LEAVITT,<SMALL><SUP>1</SUP></SMALL> in his official capacity as United States Secretary of Health and Human Services, Appellee. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Cynthia Jokela Moyer, argued, Minneapolis, MN (David M. Glaser of Minneapolis, MN, on the brief), for appellant.
Constance A. Wynn, USDOJ, Civil Division, Washington, DC. (Barbara C. Biddle, USDOJ, Civil Division, Washington, DC, on the brief), for appellee.
Before SMITH, BEAM, and BENTON, Circuit Judges.
St. Mary's Hospital and the Rochester Memorial Hospital filed suit in the district court against the Secretary of Health and Human Services. The suit sought review of the Secretary's denial of the hospitals' claim for approximately $4.1 million in Medicare reimbursements. The district court granted the Secretary's motion for summary judgment. The hospitals appeal and we affirm.
Medicare is health insurance funded by the federal government for the aged and disabled. Before 1983, the government reimbursed hospitals for the actual costs of treating Medicare patients, subject to a reasonable-cost limitation. In 1983, the government changed its method of reimbursement to a prospective payment system. Social Security Amendments of 1983, Pub.L. No. 98-21, Title VI, 97 Stat. 65, 149-72. That change instituted a set of flat-rate reimbursements for hospitals treating Medicare patients. The reimbursement rates were set according to historic costs in a given region and applied on a prospective basis to the hospitals during the upcoming fiscal year. These new payments were made according to patients' diagnoses. Thus, with regard to a Medicare patient, treating hospitals would get a payment that was tied to the patient's diagnosis related group (DRG).
For some hospitals, outside entities provided ancillary services to the hospitals' patients—e.g., laboratory, radiology, and physical therapy services. Before 1983, Medicare allowed such ancillary providers to bill Medicare directly, under Part B, for the reasonable costs those providers incurred in providing their services. The hospitals would bill their own charges to Medicare separately, under Part A. In 1983, as part of instituting the prospective payment system and its DRG-based reimbursement scheme, Congress required hospitals to bundle (or refrain from unbundling) the expenses associated with patient care, including the costs of services furnished by outside providers. 42 U.S.C. §§ 1395y(a)(14), 1395cc(a)(1)(H).
Keeping costs together, however, posed significant problems to hospitals that had followed a practice of having ancillary providers furnish services and seek reimbursement from Medicare separately because their accounting and billing systems would have to be changed. So Congress provided a waiver of the bundling requirements for hospitals that needed time to change. The waiver provision—section 602(k) of Pub.L. No. 98-21, 97 Stat. at 165-66, which was later included in the U.S.Code as a note to 42 U.S.C. § 1395y (Supp. I 1982)—gave the Secretary the power to allow such hospitals and their ancillary providers to continue their practice of separately billing unbundled charges "for any cost reporting period beginning prior to October 1, 1986." 97 Stat. at 165. According to the section 602(k)-waiver provision, "Any such waiver shall provide that [the ancillary providers'] billing may continue to be made under part B of such title but that the payments to such hospital under part A of such title shall be reduced by the amount of the billings for such services under part B of such title." Id. at 165-66. The part B payments to the ancillary providers were not calculated according to the patient's DRG. Rather, those payments were calculated on a reasonable-cost basis. Thus, Medicare would reimburse ancillary providers according to what it cost the ancillary provider to provide the services. Under the waiver provision, then, a waiver hospital's DRG payment was reduced by the reasonable costs of ancillary services billed by and paid to the ancillary provider.
When Congress implemented the DRG system, it was concerned that those payments would not adequately reimburse teaching hospitals because such hospitals typically have higher costs per patient than non-teaching hospitals. S.Rep. No 98-23, at 52 (1983), reprinted in 1983 U.S.C.C.A.N. 143, 192; H.R.Rep. No. 98-25, at 140 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 359. Thus, the DRG payment—calculated on average per-patient costs in a particular region—would not reflect teaching hospitals' increased expenses. The prior reimbursement system also had this problem because the reasonable-cost limitations it used were similarly calculated, though not on a prospective basis. Under the prior system, Congress had allowed adjustments to the reasonable-cost limitations if a provider could show its increased costs were due to its educational activities. Under the new system, Congress carried forward the policy of paying teaching hospitals more, allowing their increased expenses to be separately reimbursed by Medicare. Three types of increased costs were identified: direct medical education (DME) expenses, capital expenses, and indirect medical education (IME) expenses. DME expenses are expenses like residents' salaries—quantifiable expenses directly related to teaching. Capital expenses are those expenses like depreciation and rents. And IME expenses reflect the general inefficiencies associated with patient care provided by residents and interns, including "the additional tests and procedures ordered by residents as well as the extra demands placed on other staff as they participate in the educational process." Id.
IME expenses are not easily quantified. So the Secretary created a formula to calculate how much money teaching hospitals would get for IME expenses. That formula—derived from a statistical analysis of teaching hospitals' costs compared to non-teaching hospitals' costs that takes into account the ratio of residents and interns to beds, 45 Fed.Reg. 21,584 (Apr. 1, 1980)—basically allows teaching hospitals to get a payment that represents a fraction of their DRG revenue. For example, if the Secretary's formula—which is now codified in 42 U.S.C. § 1395ww(d)(5)(B)—yields an "indirect teaching adjustment factor" of .10, then a teaching hospital that has $10,000 of DRG revenue in a given cost reporting period (i.e., fiscal year) would get an additional payment of $1,000 as reimbursement for IME expenses.
St. Mary's, Rochester, and the Mayo Clinic are all teaching facilities. The two hospitals house patients who are treated by the Mayo Clinic's physicians, residents, and interns. The Mayo Clinic also provided ancillary services to the hospitals' patients. Before the 1983 changes took effect, the Mayo Clinic billed Medicare separately for the ancillary services that it provided to the hospitals' patients. Under the bundling provisions, however, those charges would need to be billed by the hospitals, who would then pay the Mayo Clinic for its services. But St. Mary's and Rochester were given a section 602(k) waiver. Thus, during the cost reporting periods at issue2 the Mayo Clinic billed Medicare for the reasonable cost of the ancillary services it provided to the hospitals' patients. And these payments reduced the hospitals' DRG payments.
St. Mary's and Rochester disputed their Medicare reimbursements for the relevant cost reporting periods with their fiscal intermediary, Blue Cross and Blue Shield of Minnesota, claiming that they had been deprived of reimbursement for DME, capital, and IME expenses that they had incurred. Blue Cross sought advice from the Health Care Financing Administration (HCFA).3 The HCFA responded on August 24, 1984, with a letter from Michael J. Angellotti, the Chief of the Reimbursement and Recovery Branch of the Division of Financial Operations.
Mr. Angellotti dealt with two issues that Blue Cross had apparently raised, both of which questioned the extent to which the Mayo Clinic's charges should reduce the hospitals' DRG payments. The first dealt with DME and capital expenses. Mr. Angellotti reasoned that the Mayo Clinic's payments, the amount of which was determined on a reasonable-cost basis, included some amount of capital and DME costs that the Mayo Clinic had incurred and billed to Medicare as reasonable costs. "[I]n the interest of equity," Mr. Angellotti concluded that the hospitals should not be charged with the Mayo Clinic's capital and DME costs through a reduction in the hospitals' DRG payments. In other words, Mr. Angellotti concluded that the offset that the section 602(k) waiver required had to be reduced. To make that reduction, he concluded that Blue Cross should determine what portion of the Mayo Clinic's total ancillary-services charges were attributed to DME and capital costs. This was to be done by multiplying the total nonphysician charges by the "ratio of capital and direct medical education cost to total cost of the [Mayo Clinic]." The resulting amount was not to be included in the reduction of the hospitals' DRG payments. Thus, he told Blue Cross to reduce the 602(k)-waiver offset by the amount of the charges that were attributed to the Mayo Clinic's DME and capital costs.
The second issue that Mr. Angellotti dealt with was whether the hospitals were entitled to an "indirect teaching adjustment" based on an unreduced DRG payment—i.e., an IME payment calculated from the DRG payment before the 602(k)-waiver offset for the Mayo Clinic's payments. Mr. Angellotti concluded that
[the hospitals] do not incur indirect medical education costs in the ancillary departments...
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