Transitional Hospitals Corp. v. Shalala

• Decision Date: 25 March 1999
• Docket Number: No. Civ.A. 97-01351(HHK).,Civ.A. 97-01351(HHK).
• Parties: TRANSITIONAL HOSPITALS CORPORATION OF LOUISIANA, INC., and Transitional Hospitals Corporation of Texas, Inc., Plaintiffs, v. Donna E. SHALALA, Secretary of the United States Department of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Columbia

40 F.Supp.2d 6

TRANSITIONAL HOSPITALS CORPORATION OF LOUISIANA, INC., and Transitional Hospitals Corporation of Texas, Inc., Plaintiffs, v. Donna E. SHALALA, Secretary of the United States Department of Health and Human Services, Defendant.

No. Civ.A. 97-01351(HHK).

United States District Court, District of Columbia.

March 25, 1999.

Eugene Tillman, Joseph W. Metro, Pamela K. Riley, Reed Smith Shaw & McClay, L.L.P., Washington, D.C., for plaintiff.

James Philip Ellison, United States Department of Health & Human Services, Office of General Counsel, IG Division, Scott S. Harris, Assistant United States Attorney for the District of Columbia, Office of the United States Attorney for the District of Columbia, Washington, D.C., Washington, D.C., for defendant.

ORDER AND JUDGMENT

KENNEDY, District Judge.

Pursuant to Fed.R.Civ.P. 58 and for the reasons stated by the court in its memorandum docketed this same day, it is this 25th day of March, 1999 hereby

ORDERED AND ADJUDGED that judgment is entered in favor of the plaintiffs; and it is further

ORDERED AND ADJUDGED that the defendant's regulations at 42 C.F.R. §§ 412.22(d) and 412.23(e) are declared to be invalid to the extent that they preclude newly participating long-term care hospitals from securing an exemption from the Medicare Prospective Payment System for inpatient hospital services pursuant to 42 U.S.C. § 1395ww(d)(1)(B)(iv)(I); and it is further

ORDERED AND ADJUDGED that within 30 days of the date of this order, that the defendant shall cause its fiscal intermediaries to reimburse the plaintiffs on the basis of their reasonable costs of providing inpatient hospital services for their 1993 fiscal years; and it is further

ORDERED AND ADJUDGED that the defendant pay to the plaintiffs the interest on the contested amount, pursuant to 42 U.S.C. § 1395oo(f)(2), and pay to the plaintiffs their costs and reasonable attorney's fees herein.

MEMORANDUM

The federal legislation that established Medicare requires the Secretary of the United States Department of Health and Human Services to exempt any hospital in which patients have an average length of stay greater than 25 days ("long-term care hospitals") from the Medicare Prospective Payment System ("PPS" or "Prospective Payment System"). 42 U.S.C. § 1395ww(d)(1)(B)(iv). The plaintiffs, Transitional Hospitals Corporation of Louisiana, Inc., and Transitional Hospitals Corporation of Texas, Inc., operate two long-term care hospitals that furnish acute care services. They contend that the Secretary's regulations which implement the exemption from PPS for long-term care hospitals, 42 C.F.R. §§ 412.22(d), 412.23(e), are unlawful because they do not allow long-term care hospitals to be reimbursed in accordance with the mandate of the Medicare statute.

Before the court are the parties' cross motions for summary judgment. Upon consideration of the motions, the oppositions thereto, and the record of this case, the court concludes that the plaintiffs' motion for summary judgment must be granted. The regulations at issue in this case are invalid because they do not conform to Medicare's payment scheme for long-term care hospitals, the precise issue Congress addressed when it exempted long-term care hospitals from the Prospective Payment System. Moreover, even were it determined that Congress has not addressed the precise question at issue, the Secretary's regulations are not the product of a reasonable interpretation of the legislation they purport to implement.

I. BACKGROUND

The Medicare Program is a federal health insurance program that pays for medical care for people 65 years or older, certain younger disabled people, and people with kidney failure. 42 U.S.C. § 1395 et seq. Medicare insurance coverage is divided into two parts, Part A and Part B. Part A provides coverage for care in health care institutions, Part B provides coverage for physicians' services and other services. Only Part A of the Medicare Program is at issue in this case.

The Secretary of Health and Human Services is responsible for administering the Medicare Program. However, part of the administration of the Medicare Program has been delegated to the Health Care Financing Administration (HCFA) and to "fiscal intermediaries," which generally are private insurance companies. 42 U.S.C. § 1395h.

When the Medicare Program was first established, hospitals were reimbursed for the "reasonable costs" of providing services, subject to certain limits. 42 U.S.C. §§ 1395f(b)(1), 1395x(v) (1982). In 1983, in an effort to contain the increasing costs of the health care system, Congress enacted a new reimbursement system, the Prospective Payment System. Pub.L. No. 98-21 (1983) (codified at 42 U.S.C. § 1395ww(d)). Under the Prospective Payment System, hospitals are paid a predetermined rate, which is based upon the "diagnostic related group" classification of the patient's illness at the time of admission. Certain types of hospitals were excluded from the Prospective Payment System, however. 42 U.S.C. §§ 1395ww(d)(1)(B)(i)-(v). Congress provided that these hospitals would continue to be paid based upon the "reasonable costs" of services provided. 42 U.S.C. §§ 1395f(b)(1), 1395x(v)(1)(A).

The Medicare statute sets out which hospitals will be exempt from the Prospective Payment System as follows:

As used in this section, the term `subsection (d) hospital' means a hospital located in one of the fifty States or the District of Columbia other than —

(i) a psychiatric hospital (as defined in section 1395x(f) of this title),

(ii) a rehabilitation hospital (as defined by the Secretary),

(iii) a hospital whose inpatients are predominantly individuals under 18 years of age,

(iv)(I) a hospital which has an average inpatient length of stay (as determined by the secretary) of greater than 25 days, or

(II) a hospital that first received payment under this subsection in 1986 which has an average length of stay (as determined by the Secretary) of greater than 20 days ... or

(v)(I) a hospital that the Secretary has classified, at any time on or before December 31, 1990 ... as a hospital involved extensively in treatment for or research on cancer....

42 U.S.C. § 1395ww(d)(1)(B) (emphasis supplied). Thus, under this provision a long-term care hospital is exempted from the Prospective Payment System.

Pursuant to statute, HCFA promulgated regulations that implement § 1395ww(d)(1)(B). HCFA regulations require a long-term care hospital that seeks to be excluded from the Prospective Payment System to demonstrate that it has an average inpatient length of stay greater than 25 days by using data accumulated over a six month period. 42 C.F.R. § 412.23(e)(1).¹ Once a long-term care hospital qualifies as a PPS-exempt hospital, the regulations indicate that the reimbursement of the hospital in accordance with the exemption will only begin in the hospital's next full cost reporting period. 42 C.F.R. § 412.22(d).² Thus, if a long-term care hospital qualifies for a PPS exemption, the payments made to it under the Prospective Payment System during the six month data accumulation period are not adjusted retroactively to account for the higher payments it would have received had it been exempted from PPS during that period.

The plaintiffs' two hospitals opened in November and December of 1992. Compl. ¶¶ 16, 17. The hospitals requested HCFA to exempt them from PPS as of their initial start dates because they expected to admit patients with medically complex diagnoses that would require extended hospital stays. Compl. ¶ 18. HCFA refused to grant the request and also indicated that the hospitals would not be able to recoup retroactively the difference between payments under the PPS and PPS-exempt systems, even if HCFA were later to determine that the hospitals had an average length of stay of greater than 25 days during the initial period that would determine their eligibility. Compl. ¶ 19, Letter from Kathleen A. Buto to Eugene Tillman (Dec. 12, 1992) ("Buto Letter"), A.R. at 66-68.

The parties agree that the average length of stay for the two hospitals exceeded 25 days during the hospitals first cost reporting period.³ Based on that data, the Secretary exempted the two hospitals from the Prospective Payment System for the next fiscal year. Compl. ¶ 26. However, the fiscal intermediaries determined that the two hospitals would not be reimbursed at the PPS exempt rate during their first cost reporting period. Compl. ¶ 23.⁴

The plaintiffs contested the determination of the fiscal intermediaries by requesting a group hearing before the Provider Reimbursement Review Board, pursuant to 42 U.S.C. § 1395oo. On April 24, 1997, the board determined that it was without authority to determine the legal question at issue. This suit followed.

II. ANALYSIS

A. Standard of Review

Under Fed.R.Civ.P. 56, summary judgment shall be granted if the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits show that there is no genuine issue of material fact in dispute and that the moving party is entitled to judgment as a matter of law. The parties do not dispute that the plaintiffs' hospitals had an average length of stay greater than 25 days for their first cost reporting period. Thus, the dispositive issue in this case is a purely legal one: whether the applicable regulations operate to contravene the statutory criteria for granting exclusions from the Prospective Payment System.

The Secretary's determinations regarding Medicare reimbursement actions are subject to the requirements of the Administrative Procedure Act (APA), 5 U.S.C. § 701 et seq. See 42 U.S.C. § 1395oo(f). Under the APA, a court must set aside agency rules which are: arbitrary, capricious, an abuse or discretion, or otherwise not in accordance with the law; contrary to constitutional right, power, privilege, or immunity; or in excess of statutory jurisdiction, authority, or limitations, or short of...