Toledo Hosp. v. Becerra
| Decision Date | 30 September 2021 |
| Docket Number | 19-cv-3820 (DLF) |
| Parties | TOLEDO HOSPITAL, Plaintiff, v. XAVIER BECERRA, [1]in his official capacity as Secretary of the Department of Health and Human Services Defendant. |
| Court | U.S. District Court — District of Columbia |
Plaintiff Toledo Hospital brings this suit against the Secretary of the Department Health and Human Services (the Secretary) challenging the agency's denial of certain capital cost reimbursements under the Medicare Act. The agency relied on a 2006 final rule (the Rule) in denying the requested reimbursements.
Before the Court are cross-motions for summary judgment. Dkt. 16; Dkt. 18. The Court concludes that the Secretary acted arbitrarily and capriciously when it promulgated the Rule without considering the relative costs of capital based on the hospitals' locations. Accordingly, the Court will grant in part Toledo Hospital's motion, deny the Secretary's motion, set aside the Secretary's final determination, and remand this case to the fiscal intermediary to reconsider whether Toledo Hospital is entitled to receive certain capital cost reimbursements under the Medicare Act.
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, “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). 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 (PPS) to reimburse hospitals at “prospectively fixed rates.” Cnty. of Los Angeles v. Shalala, 192 F.3d 1005, 1008 (D.C. Cir. 1999) (quotation omitted); see Social Security Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat. 65, 149.
The Act provides for the reimbursement of hospital operating costs in subsection (d) of § 1395ww. See 42 U.S.C. § 1395ww(d). This reimbursement is based on predetermined rates for patient discharges that are “set according to historic regional costs and patients' diagnoses.” Bayside Cmty. Hosp. v. Sebelius, No. 07-cv-1562, 2009 WL 9536725, at *1 (D.D.C. Sept. 30, 2009).
Subsection (d) sets out a complicated and detailed process for calculating payment under the operating PPS. Prospective “payment rates are tied to the national average cost of treating a patient in a particular ‘diagnosis-related group.'” Se. Ala. Med. Ctr. v. Sebelius, 572 F.3d 912, 914 (D.C. Cir. 2009) (quoting 42 U.S.C. § 1395ww(d)). Thus, for a given inpatient discharge, the Secretary calculates an expected cost based on average resources used and costs incurred, 42 U.S.C. § 1395ww(d)(4), and “establishes a nationwide standardized rate for all subsection (d) hospitals located in an ‘urban' or ‘rural' regional area.” Geisinger Cmty. Med. Ctr. v. Sec'y U.S. Dep't of Health & Hum. Servs., 794 F.3d 383, 387 (3d Cir. 2015) (citing 42 U.S.C. § 1395ww(d)(2)(A)-(D)). The Secretary then adjusts this rate by, among other factors, a “wage index” based on the “specific geographic area where the hospital is located.” Id. This accounts for “the difference between hospitals' local wages and wage-related costs and the national average.” Id. (citing § 1395ww(d)(3)(E)); see Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2006 Rates, 70 Fed. Reg. 47, 278, 47, 281 (Aug. 12, 2005). A higher wage index corresponds with higher labor costs, and consequently, a higher reimbursement rate for the hospital. Geisinger, 794 F.3d at 387.
A hospital's geographic placement plays a key role in determining its operating prospective payment rate. For instance, a facility's location-urban or rural-will affect the facility's wage index value. See 42 U.S.C. § 1395ww(d)(3)(E)(i). The Secretary has defined an “urban area” by adopting the definition of “metropolitan statistical area” promulgated by the Office of Management and Budget. See 42 C.F.R. § 412.64(b)(1)(ii)(A); Baystate Franklin Med. Ctr. v. Azar, 319 F.Supp.3d 514, 518 (D.D.C. 2018). A “rural area” is “any area outside an urban area.” 42 C.F.R. § 412.64(b)(1)(ii)(C); see E. Tex. Med. Ctr.-Athens v. Azar, 337 F.Supp.3d 1, 5 (D.D.C. 2018).
Initially, this reimbursement system “yielded inequitable results for some hospitals.” Robert Wood Johnson Univ. Hosp. v. Thompson, 297 F.3d 273, 276 (3d Cir. 2002). For example, a hospital in an area with a low wage index might in fact “compete for the same labor pool as hospitals in a nearby, larger urban area.” Id. Yet even though its labor costs are high, it would receive a lower reimbursement “based on its geographical area's wage index.” Lawrence + Memorial Hosp. v. Burwell, 812 F.3d 257, 260 (2d Cir. 2016).
To solve this problem, in 1989, Congress enacted a new provision within subsection (d) to establish a geographic reclassification system. 42 U.S.C. § 1395ww(d)(10); see Robert Wood Johnson Univ., 297 F.3d at 276. Under this system, the newly-created Medicare Geographic Classification Review Board (Board) “can redesignate hospitals to a different area from that to which they have been otherwise designated, in order to receive a different wage reimbursement rate” if they meet certain criteria. Lawrence + Memorial Hosp., 812 F.3d at 259 (citing 42 U.S.C. § 1395ww(d)(10)). Thus, a hospital (either rural or urban) with a lower wage index can reclassify to a higher wage index area (often, a nearby urban area) to more accurately reflect its labor costs. See Id. at 260-61.
And when a rural hospital redesignates to an urban area for a different wage reimbursement rate, it otherwise retains its rural status. See Geographical Classification Review Board; Procedures and Criteria, 55 Fed. Reg. 36, 754, 36, 760 (Sept. 6, 1990) (). As a result, “a hospital [may] reasonably be viewed as ‘rural' in some respects (e.g., it is situated in a rural area and attends to the needs of a rural population) and ‘urban' in other respects (e.g., it needs to attract trained staff from nearby urban areas and to do so must pay urban wage rates).” Lawrence + Memorial Hosp., 812 F.3d at 259.
In 1999, Congress enacted a new geographic reclassification scheme. Section 401 of the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. No. 106-113, 113 Stat. 1501, amends, in relevant part, subsection (d). Section 401 permits select hospitals located in an urban area to be reclassified as rural. See 42 U.S.C. § 1395ww(d)(8)(E).[2]To reclassify from urban to rural, a hospital can, for instance, demonstrate that it would qualify as a rural referral center[3] or a sole community hospital[4] but for its urban status. 42 U.S.C. § 1395ww(d)(8)(E)(ii)(III). Unlike the wage-index reclassification, a Section 401 reclassification is not based on the hospital's costs. See id.
Accordingly, under the current reclassification mechanisms, a geographically urban hospital may be “classified as ‘rural' in order to obtain favorable drug pricing” that it could not have otherwise received, among other benefits under Section 401. Lawrence + Memorial Hosp., 812 F.3d at 259. And at the same time, the hospital may apply to the Board to be designated to a higher wage-index urban area (including a different urban area than the one in which the hospital is geographically located) in order to obtain higher wage reimbursements. Id.
Under the Act, there is also a prospective payment system for a hospital's capital costs: the capital prospective payment system, or capital PPS. 42 U.S.C. § 1395ww(g). As with operating costs, “until the late 1980s, capital reimbursements were provided on a reasonable cost basis, ” but in 1987, “Congress directed the Secretary . . . to develop a capital recovery scheme for hospitals through the inpatient prospective payment system.” Select Specialty Hosp.-Bloomington, Inc. v. Burwell, 757 F.3d 308, 309 (D.C. Cir. 2014); see Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203, § 4006(b)(1), 101 Stat. 1330. The Act provides for the capital PPS in subsection (g) of § 1395ww. See 42 U.S.C. § 1395ww(g). In contrast to subsection (d)'s provisions governing the operating PPS, under subsection (g), Congress granted the Secretary broad discretion to design and implement the capital PPS. See id.
Under subsection (g), the Secretary “shall provide for (I) a payment on a per discharge basis, and (II) an appropriate weighting of such payment amount as relates to classification of the discharge.” Id. § 1395ww(g)(1)(B)(i) (emphasis added). The remaining features of the capital PPS are discretionary. For instance, the Secretary “may provide for an adjustment to take into account variations in the relative costs of capital and construction for the...
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