University of Kentucky v. Shalala

• Decision Date: 13 January 1994
• Docket Number: Civ. A. No. 92-521.
• Citation: 858 F. Supp. 639
• Parties: UNIVERSITY OF KENTUCKY, Plaintiff, v. Donna E. SHALALA, Secretary of Health and Human Services, Defendant.
• Court: U.S. District Court — Eastern District of Kentucky

858 F. Supp. 639

UNIVERSITY OF KENTUCKY, Plaintiff, v. Donna E. SHALALA, Secretary of Health and Human Services, Defendant.

Civ. A. No. 92-521.

United States District Court, E.D. Kentucky, Lexington.

January 13, 1994.

Steven L. Beshear, Ashley W. Ward, Stites & Harbison, Lexington, KY, and Carel T. Hedlund, Ober, Kaler, Grimes & Shriver, Baltimore, MD, for plaintiff.

Dell M. Littrell, U.S. Attorney's Office, Lexington, KY, and Lana Smith Sensenig, U.S. Dept. of Health & Human Services, Atlanta, GA, for defendant.

MEMORANDUM OPINION

FORESTER, District Judge.

I. INTRODUCTION

Plaintiff University of Kentucky brings this action pursuant to Section 706 of the Administrative Procedure Act ("APA"), 5 U.S.C. § 706, to obtain judicial review of the final decision by the Defendant Secretary of Health and Human Services ("Secretary") concerning Medicare reimbursement under Part A to the Plaintiff's University Hospital for fiscal year ending ("FYE") June 30, 1987. As a result of the Secretary's decision, the University Hospital's Medicare reimbursement was reduced in the amount of approximately $249,000.00. In determining the Plaintiff's Medicare reimbursement under Part A, the Secretary concluded that the time spent by its interns and residents in the clinics in the Medical Plaza building should not be counted in calculating the Part A reimbursement because the clinics in the Medical Plaza building were "freestanding" and not part of the University Hospital.

In bringing this action, Plaintiff contends that the Secretary's decision is arbitrary and capricious and that it is not supported by substantial evidence when the record is viewed as a whole. 42 U.S.C. § 1395oo(f)(1), incorporating 5 U.S.C. § 706(2).

This matter is before the Court on cross-motions for summary judgment. The Court having heard oral argument on these motions and these motions having been fully briefed, they are ripe for consideration.

II. FACTUAL BACKGROUND

A. History of the Medicare program

In 1965, the Medicare program administered by the Defendant was established to provide health insurance for the elderly and the disabled. Social Security Amendments of 1965, Pub.L. No. 89-97, § 102(a). The Medicare program is divided into two parts: Part A and Part B. Part A, known as the "health insurance program," provides insurance for inpatient hospital and related post-hospital services, 42 U.S.C. §§ 1395c, 1395d. Part B establishes a voluntary program of "supplementary medical insurance" covering physicians' charges and other medical services. 42 U.S.C. §§ 1395k, 1395l and 1395x(s).

Plaintiff herein is contesting the amount of its reimbursement under Part A of the Medicare program (hereinafter referred to as "hospital reimbursement"). The medical services rendered in the physician clinics involved in this case are payable to the physicians or clinics under Part B of the Medicare program (hereinafter referred to as "physician reimbursement").

1. Hospital Reimbursement

Prior to 1983, a hospital received Medicare reimbursement under Part A for both inpatient and outpatient medical services based primarily on the "reasonable cost" of covered services. 42 U.S.C. § 1395f(b). The Medicare program defined "reasonable cost" to mean "the cost actually incurred" exclusive of incurred costs "found to be unnecessary in the efficient delivery of needed health services." Id. § 1395x(v). Consequently, when a hospital's costs of providing covered services increased, its reimbursement under Part A likewise increased, resulting in (1) the burden of cost increases being shifted from the hospitals to the federal government, and (2) little or no incentive for hospitals to provide covered services economically and efficiently. For this and other reasons, the cost of reimbursement under Part A experienced significant increases in the 1970s and early 1980s.

To curtail the rapidly rising cost of Part A reimbursement, in 1983 Congress enacted the Prospective Payment system ("PPS"), which substantially altered the method of payment for inpatient operating costs reimbursable under Part A.¹ Section 1886(d) of the Social Security Act. 42 U.S.C. § 1395ww(d). Under the PPS, acute care hospitals, such as the Plaintiff's, are reimbursed on the basis of prospectively determined federal rates, instead of actual operating costs, for inpatient services. 42 U.S.C. § 1395ww(d)(1), (d)(4); see 42 C.F.R. § 412.60. After implementation of the PPS, patients were divided into "diagnosis-related groups" ("DRGs"), and Medicare payments for inpatient operating costs are now based primarily on a nationally uniform federal rate, comprised of both national and regional reimbursement rates, for each DRG. Id. § 1395ww(d)(2), (d)(3); see 42 C.F.R. §§ 412.62, 412.63.

With the enactment of the PPS program, Congress also adopted several provisions designed to accommodate the needs of teaching hospitals that have interns and residents (hereinafter "residents") on their premises, such as Plaintiff's University Hospital. One of the provisions relevant to this case that Congress enacted for the benefit of teaching hospitals is the indirect medical education ("IME") adjustment that was designed to compensate teaching hospitals for the "indirect costs" of medical education. 42 U.S.C. § 1395ww(d)(5)(B). Teaching hospitals have greater indirect inpatient costs than do non-teaching hospitals. These increased inpatient costs are a function of (1) the greater number of tests and procedures ordered by residents, as a part of the teaching process, than would ordinarily be ordered by more experienced physicians, and/or (2) the costs associated with patients requiring more extensive care than in non-teaching facilities. (A.R. 258-261, 477-78, 483).²

A teaching hospital's indirect inpatient costs of medical education are not separately identifiable on its cost report; instead, they are reflected in overall increased operating costs. Therefore, to compensate the teaching hospital for these increased but not separately identifiable operating costs, the Medicare program statistically estimates these costs as a function of teaching intensity that is expressed as a ratio of the number of full-time equivalent (hereinafter "FTE") residents to the number of available beds in the hospital. 51 Fed.Reg. 16775 (A.R. 486).

As originally enacted in 1983, the regulation concerning the IME adjustment only allowed residents in the inpatient departments of a hospital to be counted in determining the FTE equivalent. 42 C.F.R. § 412.118(g) (1985). However, in 1986, the PPS statute was amended to allow teaching hospitals to count the time spent by residents in both the inpatient and outpatient departments of hospitals in calculating the FTE equivalent, which is a factor in determining the IME adjustment. Consolidated Omnibus Reconciliation Act of 1985 ("COBRA"), Pub. Law 99-272, Section 9104 (hereinafter the "COBRA Amendment"). Thereafter, the Secretary modified the regulations to conform to the COBRA Amendment by promulgating the following regulation:

Interns and residents who are assigned to a setting other than the inpatient or outpatient department of the hospital (such as a freestanding family practice center or an excluded distinct part hospital unit) on the day that the count of interns and residents ... is made are not counted as full-time equivalents. Only the percentage of time that the interns and residents spend in the portion of the hospital subject to the prospective payment system or in the outpatient department of the hospital on the day the count is made is used to determine the indirect medical education adjustment.

42 C.F.R. § 412.118(g)(1) (1986) (recodified as § 412.105(f)(5) (1991)). Subsequently, Congress followed suit by requiring the Secretary to "continue to count interns and residents assigned to outpatient services of the hospital as part of the calculation of the full-time equivalent number of interns and residents" for the IME adjustment. Pub.L. No. 99-272, § 9104(a), amending 42 U.S.C. § 1395ww(d)(5)(B)(iv) (A.R. 700).

2. Physician Reimbursement

Historically, the Medicare program reimbursed physicians on the basis of the lowest of their usual, customary and prevailing charges for similar services. 42 U.S.C. § 1395u(b)(3). Under this payment plan, separate charges were established for each procedure (such as extended office visits, x-rays, and other tests) based on the actual charges by physicians in private practice.

In the private practice setting, no problems were encountered in distinguishing Medicare payments under Part A and Part B. The hospital received payment for its costs under Part A, and the physician who practiced in his own private office independent of the hospital received payment under Part B based on the "reasonable charges" for the services rendered.³ Since the "reasonable charges" were developed for physicians in private practice, the Part B payment was presumably sufficient to compensate the physician for (1) the professional services rendered, (2) all of the physician's overhead costs of running his office, and (3) a profit factor.

However, the distinctions in payment between Medicare payments under Part A and Part B for the hospital-based physician have not been as clear-cut as for the physician in private practice and have been the source of continuing controversy. Prior to 1982, the "reasonable charge" levels did not vary depending on where the services were provided, and hospital-based physicians received the same amount of payment as physicians in private practice regardless of the fact that the services were performed in the hospital department where the overhead costs were borne by the hospital. Furthermore, when physician services were provided in hospitals, little direction existed as to which services should be reimbursed to the hospitals on a reasonable cost basis under Part A and which services should be reimbursed to physicians on a reasonable charge basis...