Transitional Hosp. Corp. v. Shalala, 99-5166

Decision Date22 August 2000
Docket NumberNo. 99-5166,99-5166
Citation222 F.3d 1019
Parties(D.C. Cir. 2000) Transitional Hospitals Corporation of Louisiana, Incorporated, and Transitional Hospitals Corporation of Texas, Incorporated, Appellees v. Donna E. Shalala, Secretary, Department of Health and Human Services, Appellant
CourtU.S. Court of Appeals — District of Columbia Circuit

Appeal from the United States District Court for the District of Columbia(No. 97cv01351)

Anne M. Murphy, Attorney, U.S. Department of Justice, argued the cause for appellant. With her on the brief were David W. Ogden, Acting Assistant Attorney General, Anthony J. Steinmeyer, Assistant Director, and Wilma A. Lewis, U.S. Attorney.

Eugene Tillman argued the cause for appellees. With him on the brief was Tamara V. Scoville.

Before: Williams, Rogers, and Garland, Circuit Judges.

Opinion for the Court filed by Circuit Judge Garland.

Garland, Circuit Judge:

The Medicare program reimburses certain categories of hospitals on a "reasonable cost" basis, rather than under the generally applicable, and less remunerative, "Prospective Payment System." Long-term care hospitals are one such category. Plaintiffs own two new facilities for which they sought classification as long-term care hospitals before they began admitting patients. The Department of Health and Human Services (HHS) rejected plaintiffs' request, citing regulations that require new hospitals to have six months of experience before they can qualify as "long-term." In enacting those regulations, the Secretary of HHS took the position that an initial data-collection period is statutorily required. Plaintiffs, challenging the regulations in the district court, took the opposite position: that the Medicare statute does not mandate an initial data-collection period and in fact manifestly requires HHS to reimburse them as long-term hospitals from the first day of operation. The district court agreed with plaintiffs and declared HHS' regulations invalid.

We do not find the statute as clear as either side suggests, but rather conclude that Congress intended the Secretary to exercise discretion in determining the manner in which a hospital qualifies as a long-term care facility. We therefore reverse the decision of the district court. However, because the Secretary mistakenly believed that she lacked such discretion, we remand the case to permit her to determine whether she wishes to retain the existing regulations knowing that other options are permissible.

I

Medicare is a federal health insurance program for the aged and disabled that is administered by the Health Care Financing Administration (HCFA) of HHS. See 42 U.S.C. §§ 1395 et seq. Under Medicare Part A, institutional health care providers are reimbursed for their services to eligible patients. See id. §§ 1395c to 1395i-5. From its inception until 1983, Medicare reimbursed hospitals for the "reasonable cost" of providing inpatient care, subject to certain limitations. Id. § 1395f(b) (1982); see also id. § 1395x(v).

By 1983, Congress had become concerned that hospitals reimbursed on a reasonable cost basis lacked incentives to operate efficiently. This concern led to the revision of the Medicare payment system in that year. See Social Security Amendments of 1983, Pub. L. No. 98-21, § 601, 97 Stat. 65, 149. See generally County of Los Angeles v. Shalala, 192 F.3d 1005, 1008-09 (D.C. Cir. 1999). In place of the reasonable cost method, Congress enacted the Prospective Payment System (PPS) as the principal method of compensating hospitals for inpatient care provided to eligible patients. Under PPS, hospitals are reimbursed according to flat rates established in advance for the various categories of patient diagnoses (known as "diagnosis-related groups" or "DRGs"). 42 U.S.C. § 1395ww(d). The rates reflect the average cost associated with treating a patient for a specific condition, and encourage hospitals to keep costs within the anticipated reimbursement levels. For the care of patients whose hospitalizations are extraordinarily costly or lengthy, the statute authorizes the Secretary to make "outlier payments" to supplement the standard PPS disbursement. Id. § 1395ww(d)(5)(A)(i)(vi); see County of Los Angeles, 192 F.3d at 1009.

Because PPS was "developed for short-term acute care general hospitals," Congress acknowledged that it did not "adequately take into account special circumstances of diagnoses requiring long stays." S. Rep. No. 98-23, at 54 (1983).Thus, Congress altogether excluded from PPS certain types of hospitals that treat atypical patient populations. These hospitals instead receive reimbursement for inpatient care under the reasonable cost system. See 42 U.S.C. § 1395ww(d)(1)(B). One type of hospital subject to the statutory exclusion is a long-term care hospital, which the statute describes as "a hospital which has an average inpatient length of stay (as determined by the Secretary) of greater than 25 days." Id. § 1395ww(d)(1)(B)(iv)(I).1 The availability of this exclusion is the central issue in the case before us.

A

HHS implemented the new PPS reimbursement scheme by enacting regulations in 1984. In issuing its final rule, although not in the rule itself, HHS announced that it intended to apply the statutory exclusions prospectively only: any change in a hospital's status (i.e., whether it was subject to or excluded from PPS) that occurred during one cost reporting period would generally take effect only at the start of the next period, with each period typically lasting one year. See Medicare Program; Prospective Payment for Medicare Inpatient Hospital Services, 49 Fed. Reg. 234, 243 (1984).Thus, a new hospital would not qualify for the exclusion at least until the initial reporting period was over. To accommodate new hospitals, HHS permitted an abbreviated initial cost reporting period of six months, rather than the usual one year. See 42 C.F.R. § 405.471(c)(5)(i), (c)(5)(ii)(B) (1983),

now codified at 42 C.F.R. § 412.23(e)(1), (e)(3)(ii).2

In 1992, HHS formalized its prospective approach to exclusions by proposing and then adopting the following rule:

For purposes of exclusion from the prospective payment systems ..., the status of each currently participating hospital ... is determined at the beginning of each cost reporting period and is effective for the entire cost reporting period. Any changes in the status of the hospital are made only at the start of a cost reporting period.

42 C.F.R. § 412.22(d). Thus, a hospital that qualifies for the exclusion in the middle of a reporting period will not benefit until the next reporting period. By the same token, a hospital that ceases to qualify in the midst of a cost reporting period will nevertheless be compensated as though it were exempt for the entire period. See Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1993 Rates, 57 Fed. Reg. 23,618, 23,657 (1992). For a new hospital, HHS' rule confirmed that the exclusion does not begin until the first six months of data collection have passed.

In response to the notice of proposed rule making, the National Association of Long Term Hospitals (NALTH) suggested that HHS permit new long-term care hospitals to self certify their average length of stay from the start. See Letter from NALTH to HCFA at 2 (July 31, 1992) (J.A. at 53) [hereinafter NALTH Ltr.].3 HHS, however, concluded that it did not have the discretion to permit self-certification by long-term care hospitals. "We do not believe that the statute permits us," the Department said, "to extend the exclusion for long-term care hospitals to a hospital which has not demonstrated actual compliance with the statutory requirement." Medicare Program; Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 1993 Rates, 57 Fed. Reg. 39,746, 39,800-01 (1992) [hereinafter Final Rule]. The "criterion for exclusion as a long-term care hospital (average inpatient length of stay greater than 25 days) can be assessed only over a period of time. Thus, a hospital cannot qualify as a long-term care hospital until it has been in operation for some period of time." Id. at 38,801.

B

Plaintiffs Transitional Hospitals Corporation of Louisiana and Transitional Hospitals Corporation of Texas (hereinafter "the THC plaintiffs") opened two new hospitals at the end of 1992. Both were intended to treat patients with medically complex conditions requiring extended inpatient stays, thereby qualifying for the long-term care hospital exclusion from PPS. Before commencing operations, the THC plaintiffs wrote HCFA stating that they "only expect to admit patients whose medical conditions will result in lengths of stay in excess of 25 days." Letter from Counsel for THC to HCFA at 2 (Nov. 12, 1992) (J.A. at 57) [hereinafter THC Ltr.]. They asked HCFA to exclude them from PPS from the starting date of their Medicare provider agreements, rather than reimburse them under PPS during their first six months of operation. See id. at 4 (J.A. at 59).

Kathleen Buto, the Director of HCFA's Bureau of Policy Development, wrote back denying plaintiffs' request. Buto said that the statute mandates exclusion only for "a hospital which has [emphasis added] an average length of stay (as determined by the Secretary) of greater than 25 days."Letter from HCFA to Counsel for THC at 2 (Dec. 24, 1992) (J.A. at 63) (alteration and emphasis in original) [hereinafter Buto Ltr.]. Noting that HHS regulations implement that mandate by "examining [a hospital's] actual operating experience in a past period, rather than by relying on its admission criteria or other formalized statements of how the hospital is intended or expected to operate," Buto concluded that the THC plaintiffs could not qualify for the exclusion in advance.Id. at 2-3 (J.A. at 63-64).

Having had their request turned down, the THC plaintiffs proceeded with the six-month...

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