Wash. Reg'l Medicorp Dba Fayetteville City Hosp. v. Burwell

• Decision Date: 31 October 2014
• Docket Number: Case No. 1:13–cv–00622 CRC
• Citation: 72 F.Supp.3d 159
• Parties: Washington Regional Medicorp dba Fayetteville City Hospital, Plaintiff, v. Sylvia Mathews Burwell, Secretary, U.S. Department of Health and Human Services, Defendant.
• Court: U.S. District Court — District of Columbia

72 F.Supp.3d 159

Washington Regional Medicorp dba Fayetteville City Hospital, Plaintiff

v.Sylvia Mathews Burwell, Secretary, U.S. Department of Health and Human Services, Defendant.

Case No. 1:13–cv–00622 CRC

United States District Court, District of Columbia.

Signed October 31, 2014

Dan Mark Peterson, Dan M. Peterson PLLC, Fairfax, VA, for Plaintiff.

Bridgette L. Kaiser, U.S. Department of Health & Human Services, Washington, DC, for Defendant.

MEMORANDUM OPINION

CHRISTOPHER R. COOPER, United States District Judge

Fayetteville City Hospital, an Arkansas inpatient psychiatric facility, challenges the method used by the Secretary of Health and Human Services to calculate the hospital's reimbursement for services it provided to Medicare patients in the two years after statutory caps on reimbursements expired in 2002. Because the relevant provisions of the Medicare statute, 42 U.S.C. § 1395 et seq., required the Secretary's calculation method and, alternatively, because she reasonably interpreted the statute and its implementing regulations in calculating the reimbursement amount, the Court will deny Fayetteville's summary judgment motion and grant the Secretary's.

I. Background

The factual background of this case is not in dispute. The Centers for Medicare and Medicaid Services (“CMS”)—the branch of the Department of Health and Human Services that administers the Medicare program—reimburses hospitals for services provided to Medicare patients based on annual cost reports. Pl.'s Mot. Summ. J. at 2. Until 1983, CMS calculated reimbursements based on a “reasonable-cost” payment system: A hospital reported its actual costs of serving Medicare patients, and CMS reimbursed the hospital for those costs it determined were reasonable. Id. In 1983, Congress amended the Social Security Act to replace the “reasonable-cost” system with a prospective payment system (“PPS”) for inpatient hospital services. Social Security Act Amendments of 1983, Pub.L. No. 98–21, 97 Stat. 65. The PPS bases hospital reimbursement on prospectively-determined national rates, rather than actual costs. Pl.'s Mot. Summ. J. at 2. In other words, CMS sets an amount in advance that a hospital will receive for each discharge; it does not examine the hospital's actual costs and decide after the fact which will be reimbursed.

Congress initially excluded from the PPS certain types of hospitals, including psychiatric hospitals like Fayetteville. Pub.L. No. 98–21, § 601(e). Pursuant to the Tax Equity and Fiscal Responsibility Act (“TEFRA”), CMS continued to reimburse those hospitals on a reasonable-cost basis, but limited reimbursements to a “target amount.” Tax Equity and Fiscal Responsibility Act of 1982, Pub.L. No. 97–248 (codified at 42 U.S.C. § 1395ww(b) (2012) ). In the first year a hospital reported its costs under TEFRA—sometimes referred to as its “base year”—the “target amount” equaled its “allowable operating costs” for the previous reporting period. Id. § 1395ww(b)(3)(A)(i). In subsequent years, the target amount equaled the target amount for the previous year, plus an adjustment factor. Id. § 1395ww(b)(3)(A)(ii). As a result, reimbursements could increase only as fast as the adjustment factor allowed. The Secretary issued regulations implementing these statutory provisions. See 42 C.F.R. § 413.40(c)(4). So far, so good.

Congress complicated this relatively straightforward calculation with the passage of the Balanced Budget Act of 1997 (“BBA”). Pub.L. No. 105–33 (codified at 42 U.S.C. § 1395ww(b)(3)(H) ). Reflecting a concern that “[p]ayments to PPS-exempt hospitals represent some the fastest growing expenditures to Medicare,” the BBA added a new section to TEFRA that imposed caps on target amounts. H.R.Rep. No. 105–149, at 1336 (1997). From 1998 through 2002, a PPS-exempt hospital's target amount could not exceed the 75th percentile of the 1996 target amounts of a similar class of PPS-exempt hospitals, plus an update factor. 42 U.S.C. § 1395ww(b)(3)(H).

The Secretary issued regulations implementing the BBA's new 75th percentile cap regime. 42 C.F.R. § 413.40(c)(4). The regulations established a three-step process for determining a hospital's annual target amount. First, a provider's fiscal intermediary¹ determined the hospital's target amount in its TEFRA base period, as adjusted by the update factors. The result of that calculation was the “hospital specific target amount.” Id. § 413.40(c)(4)(iii)(A). Second, the fiscal intermediary determined the 75th percentile target amount. Id. § 413.40(c)(4)(iii)(B). Finally, the regulations called for a comparison of the two amounts and set the hospital's reimbursable “target amount” at the lower of the two figures. Id. § 413.40(c)(4)(iii). Like the BBA caps, the regulation implementing the caps applied from cost years 1998 through 2002.²

The plot thickened in 1999 with the passage of the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act. Pub.L. No. 106–113, § 123, 113 Stat. 1501 (1999). That Act directed the Secretary to move psychiatric hospitals onto the prospective payment reimbursement system.See Mich. Dep't of Cmty. Health v. Sec'y of Health and Human Servs., 496 Fed.Appx. 526, 529 (6th Cir.2012), cert. denied, ––– U.S. ––––, 133 S.Ct. 1581, 185 L.Ed.2d 606 (2013) (describing the effect of the Balanced Budget Refinement Act). The law called for the new system to take effect in October 2002, just as the BBA caps were scheduled to expire. CMS, however, did not begin reimbursing psychiatric hospitals based on the PPS until 2005. Id. at 530. As a result, the Secretary had to determine how to calculate reimbursements in the period between the expiration of the BBA caps in 2002 and the beginning of the PPS transition. In May 2002, the Secretary issued a notice in the Federal Register explaining that reimbursements would be calculated in accordance with the general TEFRA provisions on rates of increase. For cost reporting periods beginning in fiscal year 2003, the hospital would be paid based on the previous period's target amount, updated by the appropriate adjustment factor. 67 Fed.Reg. 31,404, 31,491 (May 9, 2002). Fayetteville's fiscal intermediary initially informed the hospital by letter that it would be reimbursed based on the “hospital-specific target amount,” but then, apparently at CMS's direction, revised its letter to state that 2003 reimbursement amounts would be updated by an adjustment factor from the 2002 target amount. Compl. ¶¶ 24–26.

And there's the rub. Fayetteville contends that calculating its 2003 reimbursement based on its 2002 target amount (which was limited by the 75th percentile cap) effectively extended the BBA caps after their expiration. Pl.'s Mot. Summ. J. at 22. It argues that the Secretary should have instead based the 2003 reimbursements on Fayetteville's “hospital specific target amount,” i.e., the net allowable costs in its base period, updated by the appropriate rate-of-increase percentage. Pl.'s Mot. Summ. J. at 16. That method would have negated the effect of the BBA caps in place in fiscal year 2002 and generated higher reimbursements.

Fayetteville ultimately received a Notice of Program Reimbursement (“NPR”) for both 2003 and 2004 reflecting CMS's lower reimbursement calculations. It timely appealed the NPRs to the Provider Reimbursement Review Board, which affirmed CMS's calculation of the reimbursements. Compl. ¶¶ 29–32. The Board also certified the dispute for expedited judicial review. Id. ¶¶ 38–39; see 42 U.S.C. § 1395oo(f)(1) (authorizing federal district court review of final Board decisions). This suit followed.

II. Standard of Review

A. Summary Judgment

Both parties move for summary judgment pursuant to Rule 56 of the Federal Rules of Civil Procedure. The Court will grant summary judgment under Rule 56 “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). Each party moving for summary judgment bears the responsibility of justifying the basis for its motion and the support in the record for the absence of any genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In this Administrative Procedures Act case, the parties rely exclusively on legal arguments regarding the Secretary's interpretation of the relevant statute and regulations. The Court is thus called upon to resolve legal questions only. See James Madison Ltd. v. Ludwig, 82 F.3d 1085, 1096 (D.C.Cir.1996).

B. Review of Agency Action

Fayetteville brings this action under the APA, 5 U.S.C. § 701 et seq. Under the APA, the Court must set aside a final agency action that is “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). The Court does not substitute its discretion for that of the agency, but rather engages in a narrow review of whether the agency has offered a rational explanation of the choice it has made. See Motor Vehicle Mfrs. Ass'n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983).

Under the familiar Chevron two-step standard, the Court first uses the traditional tools of statutory interpretation to determine “whether Congress has directly spoken to the precise question at issue.” Chevron U.S.A. , Inc. v. Nat'l Res. Def. Council, Inc., 467 U.S. 837, 842, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). If Congress's intent is clear, that is the end of the matter. Id. at 842–43, 104 S.Ct. 2778. If, however, the statute is silent or ambiguous, the court proceeds to step two, asking whether the agency's interpretation “is based on a permissible construction of the statute.” Id. at 843, 104 S.Ct. 2778. The agency's construction at step two is permissible “unless it is arbitrary or capricious in substance, or manifestly contrary to the statute.” Mayo Found. for Med. Educ. & Research v. United States, 562 U.S. 44, 131 S.Ct. 704,...