Vencor, Inc. v. Shalala

• Decision Date: 23 December 1997
• Docket Number: Civil Action No. 1:97-CV-0943-TWT.
• Citation: 988 F.Supp. 1467
• Parties: VENCOR, INC., Vencor Hospitals East, Inc., et al., Plaintiffs, v. Donna E. SHALALA, Secretary, United States Department of Health and Human Services, Defendant.
• Court: U.S. District Court — Northern District of Georgia

Page 1467

988 F.Supp. 1467

VENCOR, INC., Vencor Hospitals East, Inc., et al., Plaintiffs, v. Donna E. SHALALA, Secretary, United States Department of Health and Human Services, Defendant.

Civil Action No. 1:97-CV-0943-TWT.

United States District Court, N.D. Georgia, Atlanta Division.

December 23, 1997.

Glenn Paul Hendrix, Teresa Norwood McNally, James Richard Westbury, Arnall Golden & Gregory, Atlanta, GA, for Hahnemann Hosp. and Vencor Hospitals.

Eve H. Goldstein, Elizabeth C. Benton, Lori M. Beranek, Bruce R. Granger, U.S. Dept. of Health & Human Services, Office of General Counsel, Atlanta, GA, for Donna E. Shalala.

ORDER

THRASH, District Judge.

This matter is before the Court on the (1) Defendant's Motion for Summary Judgment [Doc. No. 12]; and (2) the Plaintiffs' Cross-Motion for Summary Judgment [Doc. No. 13].

I. BACKGROUND

Medicare is a system of federally-funded health insurance for the aged and the disabled. The program comes under the direction and auspices of Defendant Donna E. Shalala in her official capacity as the Secretary of the United States Department of Health and Human Services. The program is administered by (1) the Health Care Financing Administration's ("HCFA") national office in Baltimore; (2) ten regional HCFA offices, including Region VI headquartered in Atlanta; and (3) numerous fiscal "intermediaries" or contractors with which the HCFA contracts for administrative services. Rules, directions and instructions may be issued at each level of administration.

The Plaintiffs specialize in the provision of ventilator and respirator care both to hospital inpatients and residents of skilled nursing facilities ("SNF"). Under Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., as amended ("Medicare Act"), a SNF may receive Medicare reimbursement for care provided to their patients under certain conditions. One of the reimbursable services is respiratory therapy. A SNF may provide this service through its own employees or through employees of a hospital with which it has a "transfer agreement." 42 U.S.C. § 1395x(h)(6); 42 C.F.R. § 409.27. The requirements for a transfer agreement are set forth in 42 U.S.C. § 1395x(l). That provision was enacted in 1965 as part of the original Medicare Act and has never been amended substantively. Cf. 42 U.S.C. § 1395x(l) and § 1861(l) of Social Security Amendments Act of 1965, Pub.L. 89-97, reprinted in 1965 U.S.C.C.A.N. 305, 342 (1965).

Section 1395x(l) is written in two distinct paragraphs. The first paragraph governs circumstances where there is a written transfer agreement:

A hospital and a skilled nursing facility shall be considered to have a transfer agreement in effect if, by reason of a written transfer agreement between them ... there is reasonable assurance that

(1) transfer of patients will be effected between the hospital and the skilled nursing facility whenever such transfer is medically appropriate as determined by the attending physician; and

(2) there will be interchange of medical and other information necessary or useful in the care and treatment of individuals transferred between the institutions, or in determining whether such individuals can be adequately cared for otherwise than in either of such institutions.

42 U.S.C. § 1395x(l). The second paragraph governs circumstances in which there is no written transfer agreement:

Any skilled nursing facility which does not have such an agreement in effect, but which is found by a State agency ... to have attempted in good faith to enter into such an agreement with a hospital sufficiently close to the facility to make feasible the transfer between them of patients and the information referred to in paragraph (2), shall be considered to have an agreement in effect if and for how long as such agency ... finds that to do so is in the public interest and essential to assuring extended care services for persons in the community who are eligible for payments with respect to such services under this subchapter.

Id.

Since 1967, the HCFA has maintained formal regulations that implement the statutory requirements for transfer agreements. In 1967, HCFA promulgated regulations, adopted through a notice-and-comment process, codified at 42 C.F.R. § 405.1133(a)(1), that required in part that a SNF's transfer agreement be "with a hospital close enough to the facility to make the transfer of patients feasible." The transfer regulation was amended in 1974 pursuant to a notice-and-comment process. The amended regulation did not include language that the parties to a transfer agreement be in close geographic proximity. Since 1974, the transfer regulation, now codified at 42 C.F.R. § 483.75(n) and last amended in 1991, is consistent with the statutory language of § 1395x(l). See 42 C.F.R. § 483.75(n).

On July 19, 1995, the HCFA Regional Administrative Office for Region IV issued a memorandum to "All Intermediaries." (Doc. No. 3, Exh. 21, Watson Aff., Exh. A). The memorandum states:

Some [SNFs] and hospitals are entering into "transfer agreements" for the sole purpose of obtaining coverage of respiratory services. Many of these agreements are not valid because the hospital and [SNFs] are not close enough to make transfer of patients feasible.

(Id.). The memorandum requires that intermediaries notify:

all hospitals and [SNFs] through your provider bulletins and workshops that these invalid transfer agreements are not recognized and that respirator therapy furnished by a SNF under arrangement with a hospital in this situation is not covered under Medicare. Also remind SNFs that they are not required to inform patients of any charges for noncovered services at the time of admission (see 42 C.F.R. § 483.10(b)(6)).

(Id.). The July 19 Memorandum ostensibly relies upon 42 C.F.R. § 483.75(n), and states that:

[t]his section of the regulations indicates that transfer agreements must reasonably assure that patients will be transferred and assured of timely admission when transfer is medically appropriate. It also indicates that the hospital should he sufficiently close to the [SNF] to make transfer feasible. Unless a transfer agreement meets these requirements, it is not valid for coverage purposes.

(Id.).

Medical intermediaries have enforced the geographic-proximity requirement contained in the July 19 Memorandum, not only in Region IV, but also in other HCFA regions. In a letter dated August 9, 1995, HCFA Regional IV specifically addressed a transfer agreement between one of the Plaintiffs' competitors, Tanner Medical Center ("Tanner") and its client SNFs. (Doc. No. 3, Exh. 21, Watson Aff., Exh. B). HCFA stated in the August 9, 1995, letter that "[w]here a [SNF] is located many miles from the hospital and where there are a number of equally qualified hospitals closer to the [SNF], a transfer agreement between the two would be valid only under very unusual circumstances." (Id.). Following July 19, 1995, numerous SNFs have either canceled their transfer agreements with the Plaintiffs, threatened to cancel their transfer agreements, or declined to enter into such agreements.

On April 9, 1997, the Plaintiffs filed this Complaint for Declaratory and Injunctive Relief against the Defendant. They seek relief under the Declaratory Judgment Act, 28 U.S.C. §§ 2201 and 2202 (1988), the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701, et seq. (1988), and Title XVIII of the Social Security Act, 42 U.S.C. § 1395x(l) (1993), as amended. Specifically, the Plaintiffs seek to declare invalid as a matter of law the directive stated in the July 19 Memorandum. In the complaint, the Plaintiffs assert that the July 19 Memorandum improperly imposes a new geographic-proximity requirement for Medicare reimbursement for respiratory services performed under a transfer agreement between a hospital and the SNF and that such requirement is contrary to the language of the underlying Medicare statute, 42 U.S.C. § 1395x(l) and the accompanying regulations promulgated at 42 C.F.R. § 483.75(n). They further assert that the new requirement is contrary to HCFA's settled practice in enforcing the Medicare statute; is being applied retroactively and in an arbitrary and capricious manner; was adopted without a proper notice-and-comment process; and is unconstitutionally vague. The Plaintiffs seek an injunction permanently enjoining the Defendant from enforcing the July 19 Memorandum.

The Defendant filed a Motion to Dismiss, or Alternatively, for Summary Judgment. By Order dated September 12, 1997, the Court denied the Motion to Dismiss but reserved ruling on the Summary Judgment motion. In the Summary Judgment motion, the Defendant contends that the geographic-proximity requirement contained in the July 19 Memorandum is fully consistent with the statutory language of § 1395x(l) and that the memorandum constitutes a permissible interpretation of the statute and implementing regulation. Thus, the Defendant contends that the geographic-proximity requirement in the July 19 Memorandum does not constitute improper rule-making; has not been applied retroactively and in an arbitrary and capricious manner; and is not unconstitutionally vague. In their Cross-Motion for Summary Judgment, the Plaintiffs contend that the geographic-proximity requirement in the July 19 Memorandum is contrary to 1395x(l), the implementing regulation, and HCFA's settled practice in enforcing the Medicare statute; is being applied retroactively and in an arbitrary and capricious manner; was adopted without a proper notice-and-comment process, and is unconstitutionally vague.

II. SUMMARY JUDGMENT STANDARDS

Summary judgment is appropriate only when the pleadings, depositions and affidavits submitted by the parties show that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The evidence and any inferences that may be drawn should be viewed in the light most favorable to...