System v. Sebelius

• Decision Date: 30 December 2009
• Docket Number: Case No. 09-10195.
• Citation: 680 F.Supp.2d 799
• Parties: HENRY FORD HEALTH SYSTEM, d/b/a Henry Ford Hospital, Plaintiff, v. Kathleen SEBELIUS, Secretary U.S. Department of Health and Human Services, Defendant.
• Court: U.S. District Court — Eastern District of Michigan

680 F.Supp.2d 799

HENRY FORD HEALTH SYSTEM, d/b/a Henry Ford Hospital, Plaintiff,

v.Kathleen SEBELIUS, Secretary U.S. Department of Health and Human Services, Defendant.

Case No. 09-10195.

United States District Court,

E.D. Michigan,

Southern Division.

Decided: Dec. 30, 2009.

COPYRIGHT MATERIAL OMITTED

Andrew R. Rothman, Lebenbom &amp Rothman, P.C., Troy, MI, Ronald S. Connelly, Powers, Pyles, Sutter & Verville Washington, DC, for Plaintiff.

Jocelyn S. Beer, Office of General Counsel, Washington, DC, Peter A. Caplan United States Attorney's Office, Detroit MI, for Defendant.

OPINION & ORDER

SEAN F. COX, District Judge.

Plaintiff Henry Ford Health System d/b/a Henry Ford Hospital ("the Hospital") filed the instant suit against Kathleen Sebelius ("the Secretary"), in her capacity as the Secretary of the United States Department of Health and Human Services ("HHS"), alleging that: 1) the Secretary improperly calculated the Hospital's Medicare payments for the fiscal years between 1991 and 1996 and 1998 through 1999 by excluding residents involved in educational research from the indirect medical education full-time equivalents count; 2) the Secretary improperly excluded two of the Hospital's residency programs from inclusion in the 1996 cap exclusion for full-time equivalents; and 3) the Secretary improperly denied a remand to the fiscal intermediary for consideration of the Hospital's claims for reasonable cost reimbursement under Medicare Part B.

The case is before the Court on the Hospital's and the Secretary's cross-motions for summary judgment [Doc. Nos. 26 27]. Both parties have fully briefed the issues, and a hearing was held on December 3, 2009. For the reasons that follow, the Court GRANTS IN PART the Hospital's motion for summary judgment [Doc. No. 27], and HOLDS that the Secretary could not exclude residents engaging in educational research from the Hospital's IME resident count under the 1996 version of 42 C.F.R. § 412.105(g)(l)(ii); and FURTHER HOLDS that the Secretary could not exclude the Hospital's Vascular and Interventional Radiology and Clinical Neurophysiology programs from the "new programs" FTE cap exception in the 1998 version of 42 C.F.R. § 412.105(f)(l)(vi). Finally, the Court GRANTS IN PART the Secretary's motion for summary judgment [Doc. No. 26], and HOLDS that the Secretary properly denied a remand to the fiscal intermediary for consideration of the Hospital's alternative claim for reasonable cost reimbursement under Part B.

BACKGROUND

Prior to 1983, hospitals received Medicare payments based on that hospital's reasonable costs of in-patient hospital services. 42 U.S.C. §§ 1395f(b)(l), 1395d(a)(l). These payments reimbursed a hospital for actual expenses incurred. However, Congress abandoned the reasonable cost system after determining that government costs were too high. See 42 U.S.C. § 1395x(v)(a)(A); 42 C.F.R. § 413.30.

The reasonable cost system was replaced by the Prospective Payment System ("PPS") in 1983. Under the PPS, hospitals receive payments based on a patient's diagnosis at discharge, regardless of the hospital's actual or reasonable costs associated with treating that patient. 42 U.S.C. § 1395ww(d); 42 C.F.R. § 412.60. Congress, at least in part, switched to the PPS in order to promote efficient healthcare services. See, e.g., Riverside Methodist Hospital v. Thompson, 2003 WL 22658129, *2 (S.D.Ohio July 31, 2003). The PPS encourages efficiency by allowing a hospital to keep the full PPS payment, even if the hospital can efficiently treat a patient at a cost lower than the PPS payment.

Because teaching hospitals generally incur more costs than non-teaching hospitals, however, Congress grants teaching hospitals additional payments under the PPS. See H.R.Rep. No. 98-25(1) at 140-41 (1983), reprinted in 1983 U.S.C.C.A.N. 219, 359-60; S.Rep. No. 98-23, at 52-53, reprinted in 1983 U.S.C.C.A.N. 143, 192. These additional payments are composed of both "direct" payments, which include easily quantified costs such as a resident's salary and fringe benefits, and other, "indirect" benefits. See 42 U.S.C. § 1395. Direct benefits under section 1395 are not at issue in the instant case.

The parties dispute the proper amount of indirect medical education ("IME") payments that are owed to the Hospital for the years 1991 through 1996, and 1998 through 1999. IME payments are authorized by statute as follows:

The Secretary [of HHS] shall provide for an additional payment amount for subsection (d) hospitals with indirect costs of medical education, in an amount computed in the same manner as the adjustment for such costs under regulations [in effect as of January 1, 1983].

42 U.S.C. § 1395ww(d)(5)(B). The IME payment is derived by multiplying the PPS payment by the "IME Factor," also known as the "teaching adjustment factor." 42 U.S.C. § 1395ww(d)(5)(B).

The IME Factor is intended to reflect the level of teaching intensity at a teaching hospital, and it is arrived at by means of a mathematical formula created by statute in 1983. See Id. This formula focuses upon the ratio of full-time equivalent residents ("FTEs") to the hospital's total number of beds available. As the number of FTEs increases, the hospital's IME Factor increases, and thus the hospital receives a higher IME payment from Medicare. It is the correct manner by which HHS should calculate FTEs that is the major subject of these cross-motions.

PROCEDURAL HISTORY

The Hospital is an inpatient hospital located in Detroit, Michigan, that receives reimbursement under the PPS and operates programs for residents. At the close of each fiscal year, the Hospital files cost reports with the Medicare Part A fiscal intermediary, a contractor to whom the Secretary has delegated day-to-day operation of the Medicare program. See 42 U.S.C. §§ 1395h and 1395kk-l. The Hospital claimed medical reimbursement for certain costs associated with its residency programs for the fiscal years ending in 1991-1996 and 1998-1999 in its cost reports.

The fiscal intermediary reduced the Hospital's claimed FTEs for all eight fiscal years involved, claiming that several residency programs were not "approved" programs under 42 C.F.R. § 413.86(b). The fiscal intermediary also disallowed FTEs assigned to research rotations from the IME calculation for all eight years involved. Finally, the fiscal intermediary disallowed FTEs above the Hospital's 1996 FTE cap, which the Hospital claimed were participating in "new" programs in the 1998 and 1999 fiscal years.

The fiscal intermediary determined that these residents were participating in two programs, Vascular and Interventional Radiology and Clinical Neurophysiology, which had been training residents before the January 1, 1995 cutoff for "new" programs and therefore did not qualify for an exception to the FTE cap.

The Hospital appealed these disallowances to the Provider Reimbursement Review Board ("PRRB"), which held a hearing on September 19, 2007 for the fiscal years 1995, 1996, 1998, and 1999.¹ In a decision dated September 12, 2008, the PRRB reversed all of the fiscal intermediary's disallowances except for findings that certain residency groups not at issue in this case were not "approved." The PRRB then remanded the case to the fiscal intermediary to determine the amount that was due the Hospital for the services of its unapproved residents under Medicare Part B.

The fiscal intermediary requested that the Deputy Administrator of the Centers for Medicare and Medicaid Services ("CMS") review the PRRB's decision, including the PRRB's remand for a determination of reasonable cost reimbursements under Part B. The fiscal intermediary argued there that the Hospital had not claimed these costs on its cost report, nor had it supplied any information in support of these claimed reimbursements.

The CMS Administrator agreed to review the PRRB's decision, and in a decision dated November 13, 2008, reversed the PRRB on all issues except the unapproved residency programs which are not at issue in this case.

The CMS Administrator's decision is the Secretary's final decision pursuant to 42 C.F.R. § 405.1877(a)(4). The Hospital then filed its Complaint in the instant case on January 16, 2009, seeking judicial review of the Secretary's final decision.

STANDARD OF REVIEW

The Court exercises jurisdiction over this action pursuant to 42 U.S.C § 1395oo(f), which states that cases arising out of disputes under the Administrative Procedures Act ("APA") "shall be tried pursuant to the applicable provisions under chapter 7 of title 5." The provision of the APA that governs the scope of review in this case is 5 U.S.C. § 706, which provides that an agency's decision may be set aside only if it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," or "unsupported by substantial evidence." 5 U.S.C. § 706(2)(A), (E); see also Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 413-15, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971).

Under the substantial evidence standard, this Court may not "displace the... [Secretary's] choice between two fairly conflicting views, even though the court would justifiably have made a different choice had the matter been before it de novo." Universal Camera Corp. v. NLRB, 340 U.S. 474, 488, 71 S.Ct. 456, 95 L.Ed. 456 (1951). The Supreme Court has defined "substantial evidence" as "such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." Consolo v. Federal Maritime Commission, 383 U.S. 607, 619-20, 86 S.Ct. 1018, 16 L.Ed.2d 131 (1966).

An agency's construction of a statute is generally governed by Chevron U.S.A Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). Under Chevron, courts engage in a two step inquiry. First, the court determines whether Congress "has directly spoken to the precise question at issue." Chevron, 467 U.S. at 842-43, 104 S.Ct. 2778. If Congress' intent is clear, then ...