Tucson Medical Center v. Sullivan

Decision Date25 October 1991
Docket NumberNo. 90-5360,90-5360
Citation947 F.2d 971
Parties, 60 USLW 2315, 35 Soc.Sec.Rep.Ser. 387, Medicare & Medicaid Guide P 39,646, 2 NDLR P 132 TUCSON MEDICAL CENTER, et al., Appellants, v. Louis W. SULLIVAN, M.D., Secretary, Department of Health and Human Services, Appellee.
CourtU.S. Court of Appeals — District of Columbia Circuit

Appeal from the United States District Court for the District of Columbia (Civil Action No. 89-00187).

Ronald N. Sutter, with whom, Barbara S. Woodall, Washington, D.C., was on the brief, for appellants.

Marcus H. Christ, Atty., Dept. of Health and Human Services, Washington, D.C., for appellee.

Stuart Gerson, Asst. Atty. Gen., Dept. of Justice, Jay B. Stephens, U.S. Atty., Dept. of Justice, and Lawrence M. Meister, Atty., Dept. of Health and Human Services, Washington, D.C., were on the brief, for appellee.

Henry R. Goldberg, Washington, D.C., also entered an appearance, for appellee.

Before WALD, D.H. GINSBURG and RANDOLPH, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge:

Under Medicare, a hospital that provides services to eligible patients is entitled to reimbursement under Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395-1395ccc (1988). This case is the latest in a series of disputes growing out of the decision of the Secretary of Health and Human Services (the "Secretary") to change the way hospitals are reimbursed for inpatient medical services. The appellants are four hospitals 1 that have challenged the Secretary's 1984 wage-index rule which, when applied retroactively, had the effect of decreasing the total amount of costs for which the hospitals were entitled to reimbursement. The underlying challenge to the wage-index rule was resolved on December 12, 1988, when the Supreme Court issued its decision in Bowen v. Georgetown University Hospital, 488 U.S. 204, 109 S.Ct. 468, 102 L.Ed.2d 493 (1988) ("Georgetown I "), holding the Secretary's retroactive wage-index rule invalid. Appellants do not dispute that their claims for reimbursement have been satisfied; their only claim in this appeal is that they are entitled under the statute to interest on those amounts.

The hospitals appeal from the decision of the district court, Tucson Medical Ctr. v. Sullivan, 748 F.Supp. 28 (D.D.C.1990), dismissing as moot both their underlying claims and their claims for interest. Appellants argue that neither of their claims was moot at the time that their suit was filed, and the subsequent settlement of one of them--the underlying claim for reimbursement--did not thereby satisfy the other--the claim for interest. Furthermore, they argue that they have satisfied the statutory requirements for interest in that they properly sought judicial review, there was an amount in controversy, and they were the "prevailing party" within the meaning of 42 U.S.C. § 1395 oo(f)(2). The Secretary disagrees, arguing that both claims were moot as a result of the decision in Georgetown I and that the Secretary had indicated to the hospitals, prior to the filing of the lawsuit, that they would be paid. Furthermore, he argues that even if the claims were not moot at the time the complaint was filed, appellants are not entitled to interest because there was no causal link between the filing of the suit and the decision of the Secretary to pay the claims. Because we find that appellants' claims were not moot at the time they were filed and that appellants were prevailing parties within the meaning of the statute and so entitled to interest on their reimbursement claims, we reverse.

I. BACKGROUND
A. Reimbursement Under Medicare

Medicare was created by the Social Security Amendments of 1965, Pub.L. No. 89-97, 79 Stat. 291. It is a nationwide health insurance program primarily for people who are aged sixty-five and over and available to covered beneficiaries without regard to their incomes or wealth. Until 1987, the Medicare program paid for hospital care based, at least in part, on a retrospective reasonable cost system. At the end of the fiscal year, a provider would file a report with its "fiscal intermediary," usually a private insurance company under contract with the government, indicating the total costs for which the provider seeks Medicare reimbursement. The fiscal intermediary would then audit the report and issue a Notice of Program Reimbursement ("NPR"), indicating the allowable costs for which the provider would be reimbursed by Medicare. If the provider disputed the NPR, it could appeal to the Provider Reimbursement Review Board ("PRRB") which would conduct a hearing. The Secretary could, on his own motion, reverse, affirm, or modify the PRRB's decision. After a final decision by either the PRRB or the Secretary, an unsatisfied provider could file a complaint in federal district court. 2 If the provider subsequently became a "prevailing party" in court, it was entitled to interest on the amount in controversy, calculated from 180 days after the issuance of the NPR. See 42 U.S.C. § 1395oo (1988).

Congress discovered that the problem with a system of reimbursement based on a retrospective calculation of reasonable costs was that it provided little incentive for hospitals to keep costs down. The more they spent, the more they were reimbursed. So Congress set about gradually to change the system of hospital reimbursement. In 1972, it amended the Social Security Act to authorize the Secretary to set prospective limits on the "direct or indirect overall costs or [on] costs incurred for specific items or services" delivered by Medicare providers. The new ceilings would be based on estimates of the "costs necessary in the efficient delivery of needed health services." Social Security Amendments of 1972, Pub.L. No. 92-603, § 223(b), 86 Stat. 1329, 1393.

The next major reform occurred in 1982, when Congress passed section 101 of the Tax Equity and Fiscal Responsibility Act ("TEFRA"), Pub.L. No. 97-248, § 101, 96 Stat. 324, 331 (1982) (codified as amended at 42 U.S.C. § 1395ww(b)). TEFRA amended the Social Security Act to slow down the increase in hospital costs and generally improve the fiscal condition of the Medicare program. Specifically, TEFRA established a new, separate, interim control on hospital cost increases. It required the Health Care Financing Administration ("HCFA") to provide incentives to hospitals that kept their costs below a "target amount" and to penalize those that exceeded their target amounts. A hospital's target amount was based on the allowable operating costs for inpatient hospital services during the "base year"--that is, the year before the first year subject to TEFRA, see 42 U.S.C. § 1395ww(b)(3)(A) (1988). In other words, in order to determine the costs for which a particular hospital would be reimbursed in a given year, it was necessary to know what the "allowable operating costs of inpatient hospital services" were for the "base year." The more costs that were deemed "allowable" in the base year, the more a hospital would be reimbursed in subsequent years for those same costs.

TEFRA was supposed to last for a maximum of three years. 3 Congress intended that it would be replaced by a system based entirely on prospective payments, and it directed the Secretary to develop "proposals for legislation which would provide that hospitals, skilled nursing facilities, and, to the extent feasible, other providers, would be reimbursed ... on a prospective basis." Pub.L. No. 97-248, § 101, 96 Stat. 324, 335 (codified at 42 U.S.C. § 1320b-5(c) (1988)). In fact, for most hospitals, TEFRA lasted for only one year; the Prospective Payment System ("PPS") became effective for reporting years beginning on or after October 1, 1983. 4 Under PPS, the Medicare program began to reimburse inpatient hospital care with a prospective payment per discharge based on diagnoses rather than on actual costs of treatment. 5

B. Base Year

The TEFRA year for each hospital was the first cost reporting period beginning on or after October 1, 1982. The base year was the 12-month period immediately preceding the TEFRA year. 6 Until the Medicare reimbursement system no longer depended on some proportion of the hospital-specific cost base--in other words, until October 1, 1987 when the PPS system had been fully phased in--the costs for which a hospital would be reimbursed depended, albeit to a diminishing degree, on the precise calculation of the "allowable costs" for the base year. 7 For the reporting periods between 1982 and 1987, HCFA's determination of what was and was not to be included in the hospital's cost base had a significant impact on the amount hospitals were reimbursed.

The fiscal intermediaries calculated the base year figures by auditing year-end cost reports already submitted by the hospitals. The Secretary promulgated regulations which had the effect of excluding certain costs from the base year figure, and many of these regulations have been the subject of extensive litigation. The Secretary's regulation concerning the hospital wage index, however, may have been the most troublesome of all.

1. Wage Index

From 1974 to 1981, the Secretary published an annual cost-limit schedule for certain hospital services. The Secretary's schedule included a wage index that was used to calculate the cap on reimbursable wage costs. In 1981, the Secretary modified the wage-index formula; instead of calculating the wage index for a particular geographical area by using the average salary levels for all hospitals in the area, the 1981 wage index provided that wages paid by federal government hospitals would be excluded from the computation. Final Notice, 46 Fed.Reg. 33,637, 33,639 (1981) ("Because these hospitals typically use national pay scales, the amounts they pay their employees do not necessarily reflect area wage levels.").

Several hospitals in the Washington, D.C. area brought suit against...

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