Stephens Cnty. Hosp. v. Becerra

Decision Date30 September 2021
Docket Number20-cv-838 (DLF),19-cv-3022 (DLF),19-cv-3020 (DLF),20-cv-836 (DLF)
PartiesSTEPHENS COUNTY HOSPITAL, Plaintiff, v. XAVIER BECERRA, [1] Secretary, U.S. Department of Health and Human Services, Defendant. HALIFAX REGIONAL MEDICAL CENTER, Plaintiff, v. XAVIER BECERRA, Secretary, U.S. Department of Health and Human Services, Defendant.
CourtU.S. District Court — District of Columbia

DABNEY L. FRIEDRICH, United States District Judge

The U.S. Department of Health and Human Services reimburses certain rural hospitals for their fixed costs during years when they experience sudden decreases in patient discharges. This payment is called a “volume decrease adjustment” (“VDA”). In these consolidated cases, plaintiffs Stephens County Hospital (Stephens County) and Halifax Regional Medical Center (Halifax) challenge the Department Secretary's calculation of their VDA payments for fiscal years 2008, 2012, and 2013. Before the Court are the plaintiffs' Motion for Summary Judgment, Dkt. 26, and the Secretary's Cross-Motion for Summary Judgment, Dkt. 27. For the reasons that follow, the Court will deny the plaintiffs' motion and grant the Secretary's motion.

A. Statutory and Regulatory Background
1. Medicare Prospective Payment System

The Medicare Act establishes a federally-funded health insurance program for the elderly and disabled. See 42 U.S.C. § 1395 et seq. Medicare is administered by the Centers for Medicare and Medicaid Services (“CMS”), “a division of the Department of Health and Human Services, under the executive management of the Secretary.” Anna Jacques Hosp. v. Burwell, 797 F.3d 1155, 1157 (D.C. Cir. 2015). Under this “complex statutory and regulatory regime, ” Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404 (1993), the government pays participating hospitals for certain costs that they incur in treating Medicare beneficiaries. Methodist Hosp. v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994).

CMS contracts with Medicare Administrative Contractors to administer this payment process. 42 U.S.C. § 1395h; Gentiva Health Servs. v. Cochran, No. 19-2271, 2021 WL 827193, at *2 (D.D.C. March 3, 2021). A provider may appeal to the Provider Reimbursement Review Board (“Board”) to challenge its reimbursement payment. 42 U.S.C. § 1395oo(a). The Board's decision is final unless the Secretary, acting through the CMS Administrator, “reverses, affirms, or modifies” the Board. Id. § 1395oo(f)(1); 42 C.F.R. § 405.1875. Then, a provider may challenge a final decision by the Board or the Administrator in federal district court. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1877.

Initially, participants were reimbursed for the actual costs that they incurred, so long as the claimed costs were deemed reasonable. Anna Jacques Hosp., 797 F.3d at 1157. In 1983, concerned that this system provided hospitals with “little incentive . . . to keep costs down, ” Congress implemented the Inpatient Prospective Payment System to reimburse hospitals at “prospectively fixed rates.” Cnty. of L.A. v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999) (quotation omitted). Prospective payments are based on the “federal rate, ” a standard nationwide rate derived from the average operating costs of inpatient hospital services. Id. (citing 42 U.S.C. § 1395ww(d)(2)(A)-(B)). This rate is adjusted by a wage index that accounts for regional differences in labor costs. Id. at 1008-09 (citing 42 U.S.C. § 1395ww(d)(2)(H), (d)(3)(E)). The adjusted rate is then multiplied by “an additional weighting factor that reflects the disparate hospital resources required to treat major and minor illnesses.” Id. at 1008. This weighting factor is called a “diagnosis-related group” (“DRG”).

Accordingly, under the prospective payment system, “providers are reimbursed a fixed amount for each discharge, based on the patient's diagnosis, and regardless of actual cost.” Good Samaritan Hosp., 508 U.S. at 406 n.3 (citing 42 U.S.C. § 1395ww(d)) (emphasis added). Hospitals that “treat patients for less than the DRG amount get ‘rewarded,' while hospitals that spend more than the DRG amount must absorb the excess costs.” Cmty. Hosp. of Chandler, Inc. v. Sullivan, 963 F.2d 1206, 1207-08 (9th Cir. 1992).

Certain hospitals-“sole community hospital[s] (“SCHs”), ” 42 U.S.C. § 1395ww(d)(5)(D), [2] and “Medicare-dependent, small rural hospital[s] (“MDHs”), ” id. § 1395ww(d)(5)(G)[3]-are subject to an alternative reimbursement scheme. When an SCH or an MDH discharges a Medicare patient, it “receives reimbursement based on either the standard federal rate or a hospital-specific rate derived from its actual costs of treatment in one of the base years specified in the statute, whichever is higher.” Adirondack Med. Ctr. v. Burwell, 782 F.3d 707, 709 (D.C. Cir. 2015).

2. Volume Decrease Adjustment

Sole community and Medicare dependent hospitals are also entitled to VDA payments to support them during periods of sudden declines in patient volume. They are eligible for this adjustment in a cost-reporting period in which the hospital experiences “a decrease of more than 5 percent in its total number of inpatient cases due to circumstances beyond its control.” 42 U.S.C. § 1395ww(d)(5)(D)(ii) (SCHs); id. § 1395(d)(5)(G)(iii) (MDHs). In that case, “the Secretary shall provide for such adjustment . . . as may be necessary to fully compensate the hospital for the fixed costs it incurs in the period in providing inpatient hospital services, including the reasonable cost of maintaining necessary core staff and services.” Id. (emphasis added). To qualify, an SCH or MDH must submit documentation to the Medicare contractor “demonstrating the size of the decrease in discharges, and the resulting effect on per discharge costs” and to [s]how that the decrease is due to circumstances beyond the hospital's control.” 42 C.F.R. § 412.92(e)(2) (SCHs); id. § 412.108(d)(2) (MDHs).

The Medicare Act does not explain how to calculate the VDA. Instead, the Secretary has provided such explanation through informal rulemaking and interpretive guidance. In 1983, the Secretary promulgated a rule to provide that the VDA amount shall be based on the hospital's “needs and circumstances, ” its “fixed and semi-fixed costs, ” and “the length of time the hospital has experienced a decrease in utilization.” 42 C.F.R. § 405.476(d) (1984). “Fixed costs” are “those over which management has no control . . . such as rent, interest, and depreciation.” See Prospective Payments for Medicare Inpatient Hospital Services, 48 Fed. Reg. 39, 752, 39, 781 (Sept. 1, 1983). “Variable costs”-which were not eligible for reimbursement-are “those costs for items and services that vary directly with utilization, ” like “food and laundry services.” Id. at 39, 781-82. And some costs may be “essential for the hospital to maintain operation but will also vary with volume.” Id. at 39, 781. These [s]emi-fixed costs, ” such as “personnel related costs, ” may be considered fixed for reimbursement purposes on a “case by case basis.” Id. at 39, 781- 82.

In 1987, the Department, concerned that hospitals received VDAs even though their prospective payments (i.e., DRG revenue) exceeded their inpatient operating costs for a given year, amended its regulations. See Changes to the Inpatient Hospital Prospective Payment System and Fiscal Year 1988 Rates, 52 Fed. Reg. 33, 034, 33, 049 (Sept. 1, 1987). In that scenario, “no further adjustment should be granted.” Id. Accordingly, the amended regulation- in effect during the relevant time period for this litigation-states that the contractor will “determine[] a lump sum adjustment amount not to exceed the difference between the hospital's Medicare inpatient operating costs and the hospital's total DRG revenue for inpatient operating costs based on DRG-adjusted prospective payment rates for inpatient operating costs.” 42 C.F.R. § 412.92(e)(3) (emphasis added); see also Id. § 412.108(d)(3). Then, to decide the specific adjustment amount, the contractor is directed to “consider[] the hospital's “needs and circumstances, ” its “fixed and semi-fixed costs, ” and “the length of time the hospital has experienced a decrease in utilization.” Id. §§ 412.92(e)(3)(i), 412.108(d)(3)(i).

The Department addressed the VDA calculation in the preamble to the final rule setting prospective payment rates for fiscal year 2007. See Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2007 Rates, 71 Fed. Reg. 47, 870, 48, 056 (Aug. 18, 2006). The VDA, it reiterated, is meant to “compensate an SCH or MDH for the fixed costs it incurs in the year following the reduction in discharges.” Id. It also clarified that “not all staff costs can be considered fixed costs.” Id. As a general matter, the Secretary will treat personnel costs as fixed when hospital has experienced a short decrease in utilization. See 48 Fed. Reg. 39, 752, 39, 782. In contrast, when such a decrease continues, the Secretary expects that “a cost-effective hospital would take some action to reduce unnecessary expenses.” Id. So to determine the VDA, the contractor must “subtract[] the second year's DRG [revenue] from the lesser of: (a) The second year's costs minus any adjustment for excess staff; or (b) the previous year's costs multiplied by the appropriate [prospective payment] update factor minus any adjustment for excess staff.” 71 Fed. Reg. 47, 870, 48, 056. The hospital receives the difference. Id.

The Department noted that this formula is found in section 2810.1 of the Medicare Provider Reimbursement Manual (“Manual”), an agency guidance document. Id. Indeed, the Manual includes sample VDA calculations. PRM 15-1, § 2810.1(D); Administrative Record (AR) 119-21, Dkt. 34. “Hospital C, ” for instance,...

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