CourtUnited States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York
Citation684 F. Supp. 1234
Docket NumberNo. 87 Civ. 1080 (WCC).,87 Civ. 1080 (WCC).
PartiesUNIVERSITY HOSPITAL, NEW YORK UNIVERSITY MEDICAL CENTER, NEW YORK UNIVERSITY, Plaintiff, v. Otis R. BOWEN, M.D., Secretary of Health and Human Services, Defendant.
Decision Date02 May 1988

S. Andrew Schaffer, New York City, Hogan & Hartson, Washington, D.C., (S. Andrew Schaffer, Ada Meloy, New York City, William A. Bradford, Robert F. Leibenluft, Beth L. Rubin, Washington, D.C., of counsel), for plaintiff.

Rudolph W. Giuliani, U.S. Atty., S.D.N.Y. (Diogenes P. Kekatos, Sp. Asst. U.S. Atty., Annette H. Blum, Chief Counsel-Region II, Robert Wanerman, Asst. Regional Counsel, Office of the General Counsel, U.S. Dept. of Health and Human Services, New York City, of counsel), for defendant.


WILLIAM C. CONNER, District Judge.

Plaintiff, University Hospital, has instituted this action seeking judicial review of a final decision of the Secretary of Health and Human Services. The Secretary affirmed a decision of the Provider Reimbursement Review Board ("the Board") insofar as it held that the Hospital's Cardiovascular Special Care Unit ("CVSCU") did not qualify as a special care unit for the purposes of reimbursement under the Medicare statute, 42 U.S.C. §§ 1395-1395zz (1982). This case is presently before the Court on cross-motions for summary judgment.1 For the reasons set forth below, plaintiff's motion is granted.

I. Statutory and Regulatory Background

The Medicare program was enacted to provide health insurance benefits to eligible aged and disabled persons. It is divided into two main parts. This case is concerned with Part A of the Medicare Act, 42 U.S.C. §§ 1395c to 1395i-2, which authorizes payment by the federal government for the reasonable costs of hospital inpatient extended care services, home health services and hospice care. See 42 U.S.C. § 1395d.

Under Part A, a participating hospital, known as a provider under the Act, is eligible for reimbursement for the lesser of the "reasonable cost" or the "customary charge" of allowable "inpatient hospital services" provided to Medicare beneficiaries. 42 U.S.C. § 1395f(b).2 Providers are reimbursed by the federal government, usually through fiscal intermediaries under contract with the Secretary, which act as the Secretary's agents for the purpose of determining the amount of payments for which the provider is eligible. 42 U.S.C. § 1395h. The fiscal intermediary is commonly a private insurance company. Providers are reimbursed under Part A on an interim basis throughout a fiscal year to avoid cash flow problems. 42 U.S.C. § 1395g; 42 C.F.R. § 405.405 (1982) (current version at 42 C.F.R. § 413.60 (1987)).3 At the end of each fiscal year, every provider must submit a cost report to the intermediary to determine the final amount of reimbursement due. 42 U.S.C. §§ 1395f and 1395g; 42 C.F.R. §§ 405.406 and 405.453 (1982) (current version at 42 C.F.R. §§ 413.20 and 413.24 (1987)).

The intermediary makes a final determination of the provider's reimbursable costs after reviewing, analyzing and, where necessary, auditing the cost report. The intermediary then issues a final notice of Medicare reimbursement based on the costs claimed in the cost report, called a "notice of program reimbursement" or "NPR", which sets forth the amount and basis for the reimbursement. 42 C.F.R. § 405.1803 (1987); see also 42 U.S.C. § 1395x(v)(1)(A). If a provider is dissatisfied with the NPR, it may appeal to the Provider Reimbursement Review Board ("the Board"), provided that three jurisdictional requirements are met: (1) the provider has filed a timely cost report; (2) the amount in controversy is $10,000 or more; and (3) the appeal is filed within 180 days of the date the NPR is mailed to the provider. 42 U.S.C. § 1395oo(a); 42 C.F.R. §§ 405.1871, 405.1875 (1987). A provider who is dissatisfied with a final decision of the Board or of the Secretary may then seek review in federal district court. 42 U.S.C. 1395oo(f)(1); 42 C.F.R. § 405.1877.

Congress has authorized the Secretary to establish regulations for determining reasonable cost for reimbursement purposes under the Medicare Act. 42 U.S.C. §§ 1395f(b)(1) and 1395x(v)(1)(A). The Secretary, must apportion the costs between Medicare and non-Medicare patients based on the share of the services they have received. Id.

Pursuant to Congress's delegation of authority, the Secretary has promulgated regulations for the determination of reasonable costs. Under the regulatory definition, "reasonable cost" includes all necessary and proper expenses incurred in rendering services, such as salaries, supplies and administrative costs and maintenance, subject to principles relating to specific items of revenue and cost. 42 C.F.R. § 405.451(c)(3) (1982) (current version at 42 C.F.R. § 413.9(c)(3) (1987)). The final determination of reimbursable "reasonable cost" can be made only on the basis of a provider's annual cost report. 42 C.F.R. §§ 405.405, 405.406 (current version at 42 C.F.R. §§ 413.20, 413.60 (1987)).

The regulations divide the reasonable costs of inpatient operations into two categories: routine costs, such as room and board and the use of equipment and facilities typically included in a provider's daily service charge, and ancillary costs, such as tests, drugs and other special items and services specifically charged to particular patients. See 42 C.F.R. §§ 405.452(b)(1), 405.452(d)(2), 405.452(d)(5) (1982) (current version at 42 C.F.R. 413.53(a)(1), 413.53(b) (1987)). Routine costs are themselves subdivided into routine costs for general patient care areas, and routine costs for special care units. See id. §§ 405.453(d)(7) (current version at 42 C.F.R. § 413.53(a)(1) (1987)). The regulations also specify that routine and ancillary costs must be calculated separately, and using different methods. Id. at 405.452(b)(1) (current version at 42 C.F.R. § 413.53(a)(1) (1987)). The dispute here concerns whether the CVSCU's costs should be reimbursed as special care unit costs, a type of routine cost, or as recovery room costs, a type of ancillary cost.

Generally, a hospital's Medicare routine costs are determined by multiplying the number of Medicare inpatient days by the average routine cost per patient per day. See St. Mary of Nazareth Hospital Center v. Schweiker, 718 F.2d 459, 462 n. 7 (D.C.Cir.1983). The average routine cost per patient per day is determined by dividing the hospital's total allowable inpatient routine costs for the year by the total number of inpatient days. 42 C.F.R. §§ 405.452(d)(7) (1982) (current version at 42 C.F.R. 413.53(b)(1) (1987)).

In 1972, the Secretary realized that this formula did not lead to accurate estimates of the costs for treatment in certain newly developed hospital units that provided specialized, intensive care to the most acutely ill patents. See Villa View Community Hospital, Inc. v. Heckler, 728 F.2d 539, 540 (D.C.Cir.1984); Ward, Third Party Reimbursement Considerations, Special Care Units: A Dilemma for Medicare Reimbursement of Hospitals, 25 St. Louis U.L. J. 343, 353 (1981). These special care units included intensive care units, trauma units, coronary care units pulmonary care units, and burn units. Because of the nature of the services they provided, these units typically had greater costs per patient than units elsewhere in the hospital. In addition, the units often experienced a higher Medicare patient utilization rate than other patient care areas, because the elderly, who typically were Medicare beneficiaries, had a disproportionate need for intensive services. When the high cost services provided to Medicare beneficiaries was averaged with the lower cost services provided to non-Medicare patients, the resulting average cost per patient day was well below the actual cost per patient day of the services provided to Medicare beneficiaries. Consesquently, the providers were not adequately reimbursed. The separate calculation of average costs per patient day in special care units was intended "`to improve the accuracy of the Medicare reimbursement formula.'" St. Luke's Hospital of Bethlehem v. Schweiker, 1981-2 Medicare and Medicaid Guide (CCH) ¶ 31,501 at 9466 (E.D.Pa.1981) (quoting internal Health Care Financing Administration memorandum); see 45 Fed.Reg. 54,757 (1980) ("incorporation of these higher costs with general routine costs would unfairly skew the calculation").

To qualify as a special care unit, the unit must comply with objective criteria which the Secretary has established to ensure that costs are properly allocated and that a provider's Medicare reimbursement is as accurate and equitable as possible. These regulations require that a special care unit must meet the following conditions:

(i) The unit must be in a hospital;
(ii) The unit must be physically and identifiably separate from general routine patient care areas, including subintensive or intermediate care units, and ancillary service areas. There cannot be a concurrent sharing of nursing staff between an intensive care type unit and units or areas furnishing different levels or types of care.... Float nurses (nurses who work in different units on an as-needed basis) can be utilized in the intensive care type unit. If a float nurse works in two different units during the same eight hour shift, then the costs must be allocated to the appropriate units depending upon the time spent in those units....
(iii) There must be specific written policies that include criteria for admission to, and discharge from, the unit;
(iv) Registered nursing care must be furnished on a continuous 24-hour basis. At least one registered nurse must be present in the unit at all times (v) A minimum nurse-patient ratio of one nurse to two patients per patient day must be maintained....
(vi) The unit must be equipped, or have available for immediate use, lifesaving equipment necessary to treat the critically ill patient for which it is

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