St. Michale's Medical Center v. Leavitt ( 2009 )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
______________________________
)
ST. MICHAEL’S MEDICAL )
CENTER, et al., )
)
Plaintiffs, )
)
v. ) Civil Action No. 07-2036 (EGS)
) Civil Action No. 07-1484 (EGS)
KATHLEEN SEBELIUS,1 Secretary )
of the Department of Health )
and Human Services, )
)
Defendant. )
______________________________)
MEMORANDUM OPINION
Plaintiffs are twenty-two urban hospitals seeking additional
reimbursement from the Secretary of Health and Human Services
(“defendant” or the “Secretary”) for inpatient services
plaintiffs provided to Medicare beneficiaries during fiscal years
(“FY”) 2000 and 2001.2 The parties filed cross motions for
summary judgment, which this Court referred to a magistrate judge
1
Pursuant to Federal Rule of Civil Procedure 25(d),
Secretary Sebelius, in her official capacity as the Secretary of
the Department of Health and Human Services, is automatically
substituted as the named defendant.
2
This case was filed as two separate actions: Civil
Action No. 07-2036, which addresses claims relating to FY 2000,
and Civil Action No. 07-1484, which addresses claims relating to
FY 2001. On January 4, 2008, the Court granted the parties’
joint motion to consolidate the cases, and nothing substantive
has been filed in Civil Action No. 07-2036 since the filing of
the Administrative Record in February 2008. Because Civil Action
No. 07-1484 is the operative case, all citations to the record in
this Memorandum Opinion reference that case unless otherwise
noted.
for a Report and Recommendation. Now pending before the Court
are the parties’ objections to the Report and Recommendation.
Upon careful consideration of the Report and Recommendation, the
parties’ objections and responses to objections, the cross
motions, responses and replies thereto, the applicable law, the
entire record herein, and for the reasons stated below, the Court
rejects the magistrate judge’s recommendations, GRANTS
defendant’s motion for summary judgment, and DENIES plaintiffs’
motion for summary judgment.
I. BACKGROUND
A. Medicare Reimbursement and the Prospective Payment
System
The Medicare program, established by Title XVIII of the
Social Security Act, 42 U.S.C. § 1395 et seq., pays for covered
medical services provided to eligible aged and disabled persons.
Part A of the Medicare program authorizes payments for, among
other things, certain inpatient hospital services. See id. §§
1395c, 1395d. The Centers for Medicare and Medicaid Services
(“CMS”) (formerly known as the Health Care Financing
Administration (“HCFA”)) is the agency within the Department of
Health and Human Services that has been designated by the
Secretary to administer the Medicare program. CMS, in turn, has
delegated many of Medicare’s audit and payment functions to
fiscal intermediaries, who are generally private insurers. See
2
id. § 1395h.
Although hospitals used to be reimbursed for their actual
costs in treating beneficiaries (as long as those costs were
reasonable), most hospitals are now reimbursed through the
Prospective Payment System (“PPS”). See id. § 1395ww(d). Under
the PPS, hospitals are “paid fixed rates for providing specific
categories of treatment, known as ‘diagnosis related groups,’ or
‘DRGs.’” Bellevue Hosp. Ctr. v. Leavitt, 443 F.3d 163, 168 (2d
Cir. 2006) (citing 42 U.S.C. § 1395ww(d)). Medicare
administrators develop these rates by setting a “standard
nationwide cost rate – the ‘federal rate’ – based on the average
operating costs of inpatient hospital services. They then assign
a weight to each category of inpatient treatment, or [DRG].”
Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227
(D.C. Cir. 1994) (internal citation omitted). A hospital’s final
reimbursement per patient is determined by multiplying the
patient’s DRG and the federal rate, after that rate has been
“standardized” by making adjustments based on a variety of
factors. See 42 U.S.C. § 1395ww(d)(2)(C) (listing the factors
used for standardization).
To account for regional variations in labor costs, the
Secretary adjusts the labor-related portion of the federal rate
by a geographically specific factor commonly referred to as the
“wage index.” See 42 U.S.C. § 1395ww(d)(3)(E)(i). Specifically,
3
§ 1395ww(d)(3)(E)(i) states that
the Secretary shall adjust the proportion, (as
estimated by the Secretary from time to time) of
hospitals’ costs which are attributable to wages and
wage-related costs, of the DRG prospective payment
rates computed under subparagraph (D) for area
differences in hospital wage levels by a factor
(established by the Secretary) reflecting the relative
hospital wage level in the geographic area of the
hospital compared to the national average hospital wage
level.
Id.; see also Robert Wood Johnson Univ. Hosp. v. Shalala, 297
F.3d 273, 276 (3d Cir. 2002) (“The wage index compares the
average hourly wage for hospitals in a given geographic area with
the national average hourly wage, which in turn determines the
payment rate above or below the national average at which a
hospital is reimbursed. The wage-index for an area generally
applies to all hospitals physically located within that
geographic area.” (internal citation omitted)).
B. Geographic Classification, Reclassification, and
the Impact on the Wage Index
For the purposes of the wage index, the Secretary classifies
a hospital as being located in either an urban or rural area
using Metropolitan Statistical Areas (“MSAs”), as defined by the
Executive Office of Management and Budget. See 42 C.F.R. §
412.64. Recognizing that these geographic classification
procedures impose a burden on some hospitals,3 Congress amended
3
The hospitals that tend to be most negatively impacted by
these classifications are those that compete for the same labor
pool with hospitals located in larger, urban areas with higher
4
the Medicare statute “to allow a hospital to seek
reclassification from its geographically-based wage area to a
nearby wage area for payment purposes if it meets certain
criteria.” Robert Wood Johnson, 397 F.3d at 276. The current
reclassification provisions permit a rural hospital that meets
those criteria to reclassify as urban, and qualifying urban
hospitals to reclassify either as rural or to another higher-wage
urban area. See 42 U.S.C. §§ 1395ww(d)(8)(B)(i) & (d)(10); 42
C.F.R. §§ 412.230-412.235. Congress also created the Medicare
Geographic Classification Review Board, a five-member entity that
reviews reclassification applications and, based on the specified
requirements, decides whether an applicant is eligible for
reclassification. See 42 U.S.C. § 1395ww(d)(10); 42 C.F.R. §
412.230.
Both Congress and the Secretary have recognized that
hospital reclassification can substantially impact the wage index
for both the geographic area from which a hospital originates and
the new area into which the hospital classifies. The Medicare
program therefore provides for circumstances when the wage index
data for an incoming rural hospital must be excluded from the
wage indexes. See Robert Wood Johnson, 297 F.3d at 276(describing the “inequitable results” caused by this situation);
Athens Cmty. Hosp., Inc. v. Shalala, 21 F.3d 1176, 1177 (D.C.
Cir. 1994) (“[A] hospital that is in a rural area but must
compete for labor with hospitals in a nearby urban area may be
insufficiently reimbursed for the cost of providing services.”).
5
wage index of the urban area it is entering. 42 U.S.C. §
1395ww(d)(8)(C)(i)(I)-(II). Likewise, Congress implemented a
provision to prevent the wage index of a rural area from
decreasing when a hospital originating from that area
reclassifies into an urban area.4 See id. § 1395ww(d)(8)(C)(ii).
No such statutory provision exists for urban areas, but no
reclassification may result in the reduction of a wage index of
any county below that of the State’s rural areas.5 See id. §
1395ww(d)(8)(C)(iii); see also Def.’s Objections to Magistrate
Judge’s Report & Recommendation (“Def.’s Objections”) at 5
(“[T]he Act is silent with respect to how to calculate the wage
index for an urban area after a hospital has reclassified to
another area . . . .”). Plaintiffs in this lawsuit challenge the
Secretary’s since-changed practice of calculating the wage index
for urban areas without including data from hospitals that have
reclassified into higher-wage areas.
C. Reclassification and Urban Wage Indexes
The Secretary annually publishes rules in the Federal
Register setting forth both the methodology for calculating the
wage index and the wage indexes themselves. Beginning in 1991,
4
This is often referred to as a “hold harmless” provision,
because it ensures that hospitals in rural areas are “held
harmless” from the effects of a reclassification. See Def.’s
S.J. Mem. at 7.
5
This is sometimes called the “rural floor.”
6
the Secretary publicly acknowledged the increase in urban
reclassifications and, through notice and comment rulemaking,
considered various methods to calculate the wage index for urban
areas in the wake of such reclassifications. Despite proposals
to implement a “hold harmless” provision for urban hospitals
similar to the statutory provision in place for rural areas, the
Secretary repeatedly declined to do so. See, e.g., 65 Fed. Reg.
47054, 47077 (Aug. 1, 2000) (“[E]xcept for those rural areas in
which redesignation would reduce the rural wage index value, the
wage index value for each area is computed exclusive of the wage
data for hospitals that have been redesignated from the area for
purposes of their wage index.”); 56 Fed. Reg. 43196, 43221 (Aug.
30, 1991) (“[W]e considered . . . provid[ing] the same ‘hold
harmless’ protection that the statute affords to rural areas when
hospitals are reclassified from those areas. That is, we
considered providing that the wage index value for an urban area
could not be reduced due to the reclassification of hospitals
from that area. However, we do not believe this action would be
appropriate.”).
In 2001, however, the Medicare Payment Advisory Commission
(“MedPAC”) issued a report to Congress recommending that the
Medicare statute be amended to provide a “hold harmless”
provision for urban areas. See Def.’s S.J. Mem. at 10-11 (citing
Medicare Payment Advisory Comm’n, Report to the Congress:
7
Medicare Payment Policy 82 (Mar. 2001), http://www.medpac.gov/
documents/Mar01%20Entire%20report.pdf (“MedPAC Report”), and
describing the contents of the report). The report expressed
MedPAC’s opinion that the Secretary had the authority to make
such a change by way of regulation, but noted that the agency had
been “reluctant” to do so. MedPAC Report at 83 (“HCFA appears to
have the authority to make this change through regulation.
However, because the protection for nonreclassified
rural hospitals was enacted legislatively and Congress has not
legislated such protection for urban hospitals, HCFA has thus far
been reluctant to make the change itself.”).
Shortly thereafter, the Secretary did in fact propose
implementing a “hold harmless” provision for urban areas, and
discussed the MedPAC Report and its findings in the proposed
rule. See 66 Fed. Reg. 22646, 22678 (May 4, 2001). The rule was
adopted in August 2001 and has been in effect since FY 2002. See
66 Fed. Reg. 39828, 39865 (Aug. 1, 2001) (“Currently, the wage
index value for an urban area is calculated exclusive of the wage
data for hospitals that have been reclassified to another area.
For the FY 2002 wage index, we include the wage data for a
reclassified urban hospital in both the area to which it is
reclassified and the MSA where the hospital is physically
located.”).
8
D. Administrative and Judicial Review
To receive reimbursement for services, hospitals file “cost
report[s]” with their intermediaries at the end of each fiscal
year. 42 C.F.R. § 405.1801(b)(1). Intermediaries then audit the
reports and determine the reimbursement amount owed to the
providers. That determination is memorialized in a Notice of
Program Reimbursement and issued to the provider. Id. §
405.1803(a)(2).
A hospital or group of hospitals dissatisfied with an
intermediary’s reimbursement determination may file an appeal
with the Provider Review Reimbursement Board (“PRRB”). See 42
U.S.C. § 1395oo(a)-(b). The PRRB is “an administrative review
panel that has the power to conduct an evidentiary hearing and
affirm, modify, or reverse the intermediary’s [reimbursement]
determination.” Your Home Visiting Nurse Servs., Inc. v.
Shalala, 525 U.S. 449, 451 (1999). Additionally, both the
statute and the corresponding regulations provide a mechanism for
the PRRB to grant expedited judicial review (“EJR”) where the
PRRB determines that it lacks the authority to decide a legal
issue:
Providers shall . . . have the right to obtain judicial
review of any action of the fiscal intermediary which
involves a question of law or regulations relevant to
the matters in controversy whenever the Board
determines (on its own motion or at the request of a
provider of services . . . ) that it is without
authority to decide the question, by a civil action
commenced within sixty days of the date on which
9
notification of such determination is received.
42 U.S.C. § 1395oo(f)(1); see also 42 C.F.R. § 405.1842(f)(1)(ii)
(noting that before issuing an EJR decision, the PRRB must
determine that it “lacks the authority to decide a specific legal
question relevant to the specific matter at issue because the
legal question is a challenge either to the constitutionality of
a provision of a statute, or to the substantive or procedural
validity of a regulation or CMS Ruling”).
E. Factual and Procedural Background
Plaintiffs are hospitals located in multiple MSAs in New
Jersey, New York, and Connecticut from which at least one
hospital has classified to another area. See Compl. ¶¶ 3, 15.
In FY 2000 and 2001, plaintiffs submitted cost reports to their
fiscal intermediaries requesting reimbursement. Def.’s Statement
of Material Facts as to Which There is No Genuine Issue (“Def.’s
Statement”) ¶ 3. Plaintiffs were dissatisfied with their Notices
of Program Reimbursement because they believed that the data from
reclassified hospitals was improperly omitted from the wage-
index calculation, the exclusion of which resulted in reduced
reimbursements.6 Def.’s Statement ¶ 4; Compl. ¶¶ 15, 20.
6
Plaintiffs claim that recalculating the wage index with
data from the reclassified hospitals “would result in an increase
of [plaintiffs’] collective reimbursement of approximately
$23,956,069" for FY 2001 and approximately $20,588,699 for FY
2000. Compl., Civil Action No. 07-1484, at 14; Compl., Civil
Action No. 07-2036, at 14.
10
On appeal to the PRRB, plaintiffs requested (1)
consolidation into group appeals for FY 2000 and 2001, and (2)
EJR. See Def.’s Statement ¶ 5; Admin. Record (“AR”) at 432-33.
The PRRB determined that EJR was appropriate in both cases
because the PRRB was “without the authority to decide the legal
question” presented by plaintiffs’ challenge to the reimbursement
determination. AR at 2. Specifically, the PRRB noted that
plaintiffs were not seeking the type of relief – “correction of
[plaintiffs’] own wage data” – that PRRB could provide. AR at 2.
“Rather, they are seeking to have the wages of reclassified
hospitals included in their wage index calculation.” AR at 2.
Because such a remedy would require an evaluation of the
lawfulness of the Secretary’s interpretation of the Medicare
statute, the PRRB concluded that EJR was appropriate. AR at 2.
As required by 42 U.S.C. § 1395oo(f)(1), plaintiffs filed
the instant complaints within sixty days of the PRRB’s respective
EJR determinations. After the cases were consolidated in this
Court, the parties filed cross motions for summary judgment. In
December 2008, the Court referred the case to a magistrate judge
for a Report and Recommendation. The magistrate judge filed her
Report and Recommendation on March 19, 2009, recommending that
both motions for summary judgment be denied and that the action
“be remanded to the Secretary for the articulation of findings,
as to each provider which is a Plaintiff in this action, with
11
respect to what ‘adjustment’ was made pursuant to 42
U.S.C. § 1395ww(d)(3)(E).” Report & Recommendation at 9.
In reaching this recommendation, the magistrate judge
reasoned that “the absence from the administrative record of any
indication of how CMS interpreted and applied 42 U.S.C. §
1395ww(d)(3)(E)” prevented judicial review of a final agency
action. Id. at 6. The Report and Recommendation thus concluded
that “[i]n the absence of any record in the administrative record
of what determination CMS made with respect to the adjustments,
and what factors were considered in making such adjustments, the
court has no basis upon which to determine whether CMS’s
determinations were contrary to law, or otherwise arbitrary and
capricious.” Id. at 6-7. Noting that calculating the
reimbursement rates applicable to plaintiffs “would require a
virtually trial-like proceeding for the resolution of the
disputed factual issues,” the magistrate judge instead
recommended that the case be remanded to the agency for further
factual development of the record. Id. at 7.
Both plaintiffs and defendant have filed objections to the
Report and Recommendation. Those objections have been fully
briefed and are now ripe for decision.
II. Report and Recommendation
Both parties object to the Report and Recommendation’s
findings that (1) the administrative record does not make clear
12
how CMS calculated the wage indexes challenged in this case or
“what factors were considered in making such adjustments,” Report
& Recommendation at 6; and (2) the record does not contain
sufficient information about the financial impact of the
Secretary’s calculations on the amount of plaintiffs’
reimbursement, see id. at 7. More generally, the parties object
to the Report and Recommendation’s conclusion that the PRRB’s
decision does not constitute a final action, and agree that
remand is unnecessary because the PRRB properly granted EJR.
“When a party files written objections to any part of the
magistrate judge’s recommendation with respect to a dispositive
motion, the Court considers de novo those portions of the
recommendation to which objections have been made, and ‘may
accept, reject, or modify the recommended decision[.]’” Robinson
v. Winter, 457 F. Supp. 2d 32, 33 (D.D.C. 2006) (quoting Fed. R.
Civ. P. 72(b)). Upon careful review of both the Report and
Recommendation and the parties’ objections thereto, the Court
respectfully disagrees with the magistrate judge’s determination
that remand is necessary to develop the factual development in
this case.
As noted by the parties, “the sole issue” before this
Court is a legal question – whether the Secretary’s practice of
excluding data from reclassified hospitals in calculating the
wage indexes for the hospitals remaining in those urban areas
13
violated 42 U.S.C. § 1395ww(d)(3)(E). Pls.’ Statement of
Material Facts as to Which There is No Genuine Issue (“Pls.’
Statement”) ¶ 3; see also Def.’s Response to Pls.’ Statement of
Material Facts as to Which There is No Genuine Issue ¶ 3 (“The
sole issue is whether federal law mandated that the Secretary
include reclassified hospitals located in the Plaintiffs’
geographic area in the wage index calculation for the remaining
hospitals.”). The parties do not dispute that this data was in
fact excluded from the FY 2000 and 2001 calculation of the wage
indexes for plaintiffs’ geographic areas, and, as the parties
explain in their summary judgment briefing and respective
objections, the Secretary’s reasons for maintaining the
challenged policy were explained in detail in the Federal
Register. See, e.g., 56 Fed. Reg. 43196, 43221 (Aug. 30, 1991)
(explaining why the Secretary was rejecting proposals to
implement a “hold harmless” provision for urban hospitals).
The Report and Recommendation correctly notes – and the
parties fully acknowledge – that the administrative record does
not contain factual information sufficient to determine the
precise amount of additional reimbursement to which plaintiffs
would be entitled if they were to prevail in their legal
argument. See Pls.’ Objections at 9-10 (explaining that some of
the relevant information is in the administrative record, but
acknowledging that the Secretary and/or intermediary would have
14
to recalculate the exact amount at issue); Def.’s Objections at
11-12 (noting that the administrative record “contains little
beyond the documents needed to establish the PRRB’s jurisdiction
over each of the Plaintiffs”). But this deficiency in the record
does not create a material factual dispute preventing the Court
from resolving the legal question raised here.7
Moreover, the PRRB’s determination that it lacked the
authority to decide the legal question raised by plaintiffs was
in full compliance with 42 U.S.C. § 1395oo(f)(1), which
explicitly contemplates the situation presented by this case.
See Hunterdon/Somerset 2001 Wage Index Group v. Riverbend Gov’t
Benefits Adm’r, PRRB Hearing Dec. No. 2004-D13, Case No. 01-
1881GE (Apr. 14, 2004), AR at 438 (finding, on its own motion,
that EJR was warranted because “the facts material to the issue
are not in dispute. The questions posed by the Providers as
requiring Board resolution are questions regarding how CMS’s
policy is made. The Board has no authority to dictate or fashion
7
The parties’ briefing on both the cross motions and the
objections to the Report and Recommendation includes considerable
argument relating to the propriety of plaintiffs’ proposed order,
which specifically directs the Secretary to recalculate the wage
index in a particular way and orders the Secretary to reimburse
plaintiffs using these new calculations. Notwithstanding this
dispute, however, the parties agree that if plaintiffs were to
prevail on the merits, the case would have to be remanded to the
agency to recalculate the wage indexes. And because, as
discussed below, the Court concludes that defendant is entitled
to summary judgment, further consideration of plaintiffs’
proposed order is unnecessary.
15
CMS policy or to retroactively apply policy changes.”); see also
Robert Wood Johnson, 297 F.3d at 279-80 (acknowledging the
court’s jurisdiction after the PRRB granted EJR; noting that the
court’s review was “limited to the issue before the PRRB
regarding the Secretary’s interpretation” of the statute relevant
in that case). Because 42 U.S.C. § 1395oo(f)(1) has been
properly invoked, the PRRB’s EJR decision constitutes a final
decision, see 42 C.F.R. § 405.1842(h)(1), and plaintiffs “have
the right to obtain judicial review” of the calculation of their
wage index for FY 2000 and 2001, “which involves a question of
law or regulations relevant to the matters in controversy.” 42
U.S.C. § 1395oo(f)(1). This Court therefore rejects the
magistrate judge’s recommendation and will proceed to address the
merits of the parties’ cross motions for summary judgment.
III. SUMMARY JUDGMENT
A. Standard of Review
Pursuant to Federal Rule of Civil Procedure 56, summary
judgment should be granted if the moving party has shown that
there are no genuine issues of material fact and that the moving
party is entitled to judgment as a matter of law. See Fed. R.
Civ. P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986);
Waterhouse v. District of Columbia, 298 F.3d 989, 991 (D.C. Cir.
2002). In determining whether a genuine issue of material fact
exists, the court must view all facts in the light most favorable
16
to the non-moving party. See Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 587 (1986). Likewise, in
ruling on cross-motions for summary judgment, the court shall
grant summary judgment only if one of the moving parties is
entitled to judgment as a matter of law upon material facts that
are not genuinely disputed. See Rhoads v. McFerran, 517 F.2d 66,
67 (2d Cir. 1975).8
Plaintiffs’ principal claim is that the Secretary exceeded
her statutory authority and that her actions must be set aside
pursuant to 5 U.S.C. § 706(2)(C), which permits a court to “hold
unlawful and set aside agency action, findings, and conclusions
found to be . . . in excess of statutory jurisdiction, authority,
or limitations, or short of statutory right.” As the D.C.
Circuit has explained, “[i]n examining the Secretary’s
interpretation of a statute that she administers, the court
applies the familiar methodology of Chevron U.S.A., Inc. v.
Natural Resources Defense Council, Inc., 467 U.S. 837 (1984).”
Methodist Hosp. of Sacramento, 38 F.3d at 1229. The court’s
first question must be “whether Congress has directly spoken to
the precise question at issue.” Chevron, 467 U.S. at 842. “If
the intent of Congress is clear, that is the end of the matter;
for the court, as well as the agency, must give effect to the
8
The parties here agree that there are no material facts
in dispute. They vigorously dispute, of course, which side is
entitled to judgment as a matter of law.
17
unambiguously expressed intent of Congress.” Id. at 842-43.
The court moves to the second step of Chevron only “if the
statute is silent or ambiguous with respect to the specific
issue.” Id. at 843. Under those circumstances, the court must
consider whether the agency’s interpretation “is based on a
permissible construction of the statute.” Id. If so, then the
court “must defer to the Secretary’s” interpretation. Methodist
Hosp. of Sacramento, 38 F.3d at 1229. Where Congress has
implicitly delegated authority to the agency to fill a gap left
in the statutory framework, “a court may not substitute its own
construction of a statutory provision for a reasonable
interpretation made by the administrator of an agency.” Chevron,
467 U.S. at 844.
Finally, “in framing the scope of review, the court takes
special note of the tremendous complexity of the Medicare
statute. That complexity adds to the deference which is due to
the Secretary’s decision.” Methodist Hosp. of Sacramento, 38
F.3d at 1229 (giving heightened deference to the Secretary’s
policy of denying retroactive effect to a revised wage index);
see also Robert Wood Johnson, 297 F.3d at 282 (“The broad
deference of Chevron is even more appropriate in cases that
involve a ‘complex and highly technical regulatory program,’ such
as Medicare, which “require[s] significant expertise and
entail[s] the exercise of judgment grounded in policy concerns.’”
18
(quoting Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512
(1994) (additional citations omitted))).
B. 42 U.S.C. § 1395ww(d)(3)(E)(i) Does Not Speak to
the Precise Question at Issue
Plaintiffs challenge the Secretary’s exclusion of wage data
of reclassified hospitals from the calculation of their wage
indexes under § 1395ww(d)(3)(E)(i). As noted above, the statute
requires the Secretary to
adjust the proportion . . . of the DRG prospective
payment rates computed under subparagraph (D) for area
differences in hospital wage levels by a factor
(established by the Secretary) reflecting the relative
hospital wage level in the geographic area of the
hospital compared to the national average hospital wage
level.
(Emphasis added.)
Plaintiffs argue that this provision is “clear and
unambiguous” in requiring the Secretary to include the wage data
of reclassified hospitals, which are “by definition ‘in the
geographic area’ of” plaintiff hospitals, in the calculation of
the wage index. Pls.’ Mem. at 6-7. In support of this argument,
plaintiffs rely heavily on two cases: Bellevue Hospital Center
v. Leavitt, 443 F.3d 163 (2d Cir. 2006), and Anna Jacques
Hospital v. Leavitt, 537 F. Supp. 2d 24 (D.D.C. 2008).9 As
discussed below, neither of these cases supports plaintiffs’
position.
9
The Anna Jacques decision is currently on appeal to the
D.C. Circuit. See Case Nos. 08-5407 and 08-5529 (D.C. Cir.).
19
In Bellevue, the Second Circuit addressed two issues.
First, it considered and rejected the plaintiff hospitals’
challenge to the agency’s use of MSAs in defining the “geographic
areas” referred to in § 1395ww(d)(3)(E)(i). At the outset, the
Bellevue court acknowledged that the agency’s “task” under
§ 1395ww(d)(3)(E)(i) “is unambiguous: to calculate a factor that
reflects geographic-area wage-level differences, and nothing
else.” 443 F.3d at 174. Plaintiffs in this case take this
conclusion to mean that “the first sentence of
§ 1395ww(d)(3)(E)(i) is unambiguous, period.” Pls.’ Reply at 5.
Plaintiff’s reliance on Bellevue, however, fails to account
for the remainder of the Bellevue court’s discussion regarding
the term “geographic area”:
At the same time, . . . the statute leaves considerable
ambiguity as to the term “geographic area,” which,
based only on the literal language of the provision,
could be as large as a several-state region or as small
as a city block. CMS’s discretion in interpreting this
ambiguous term is cabined by the need to fulfill two
somewhat contradictory policies . . . : (1) the
geographic areas must be small enough to actually
reflect differences in wage levels and, (2) each
geographic area must include enough hospitals that
their costs can be meaningfully averaged and individual
hospitals do not get reimbursed for their own actual
costs. In balancing these two considerations, the
agency has considerable discretion. Moreover, even
after determining the scale of each geographic area,
lines must be drawn between areas that inevitably will
be contested and may seem arbitrary; once again, the
statute is silent as to how this process is to take
place, leaving the agency with broad discretion.
Bellevue, 443 F.3d at 175 (emphasis added); see id. (concluding
20
that “the use of MSAs to fill the gap left by the ambiguous term
‘geographic areas’ is reasonable”).
To the extent that Bellevue’s reasoning is applicable in the
present case, it actually undermines plaintiffs’ position that
§ 1395ww(d)(3)(E)(i) unambiguously requires the Secretary to
include particular hospitals in calculating “the relative
hospital wage level in the geographic area” of plaintiff
hospitals. Just as the Bellevue court concluded that
§ 1395ww(d)(3)(E)(i) leaves discretion to the agency to use MSAs
in determining the geographic area of a hospital for the purposes
of the wage index, so too does the statute leave open the
question of whether a hospital should be treated as located “in
the geographic area” from which it has reclassified.
The second issue addressed in Bellevue – whether the agency
acted arbitrarily and capriciously in collecting certain data
relating to the occupational mix of employees – is simply
irrelevant to the case at bar. Plaintiff’s reliance on Anna
Jacques is misplaced for the same reason. Indeed, although Anna
Jacques addressed the wage index under § 1395ww(d)(3)(E)(i), that
case concerned the agency’s interpretation of its obligation
under the second sentence of the statutory provision to gather
data for use in the calculation of wage indexes. See
§ 1395ww(d)(3)(E)(i) (“[T]he Secretary shall update the factor
under the preceding sentence on the basis of a survey conducted
21
by the Secretary (and updated as appropriate) of the wages and
wage-related costs of subsection (d) hospitals in the United
States.”). Specifically, the Anna Jacques court considered the
scope of the Secretary’s discretion to determine what types of
hospitals should be included in the survey that the Secretary is
required to conduct before updating the wage index. See 537 F.
Supp. 2d at 31 (concluding that the statute did not give the
Secretary discretion to exclude critical access hospitals from
the survey, because “the plain language of the statute indicates
that Congress required the Secretary to conduct an accurate
survey of the wages and wage-related costs of subsection (d)
hospitals,” and exclusion of critical access hospitals would not
“faithfully reflect” that information). Anna Jacques thus
addressed an entirely different part of § 1395ww(d)(3)(E)(i), one
that deals with the collection of wage-index data rather than the
calculation of a wage index after that data has been gathered.
Accordingly, the Anna Jacques court’s holding that the second
sentence of the statute is unambiguous does not shed light on
whether or not the first sentence of the statute clearly requires
the Secretary to include the data from reclassified hospitals in
its calculation.
Reading the statutory framework as a whole reinforces the
conclusion that § 1395ww(d)(3)(E)(i) does not unambiguously
require the Secretary to include reclassified hospitals in the
22
geographic area where they are physically located. Of particular
note in this regard are the other subsections of § 1395ww(d) that
explicitly (1) “hold harmless” rural hospitals,
§ 1395ww(d)(8)(C)(ii); and (2) set the “rural floor” below which
no wage index may fall as a result of reclassification,
§ 1395ww(d)(8)(C)(iii). Plaintiffs’ reading of §
1395ww(d)(3)(E)(i) would render these subsections superfluous,
because § 1395ww(d)(3)(E)(i) would already protect against the
concerns addressed by those provisions. See TRW Inc. v. Andrews,
534 U.S. 19, 31 (2001) (“It is a cardinal principle of statutory
construction that a statute ought, upon the whole, to be so
construed that, if it can be prevented, no clause, sentence, or
word shall be superfluous, void, or insignificant.” (internal
quotation marks omitted)).
In sum, the Court agrees with the Secretary that 42 U.S.C.
§ 1395ww(d)(3)(E)(i) does not clearly address how the Secretary
must treat wage data from hospitals that have reclassified to a
different area in calculating the wage index. See Def.’s S.J.
Mem. at 16. Although § 1395ww(d)(3)(E)(i) unambiguously requires
the Secretary to “establish” a “factor” that reflects “the
relative hospital wage level in the geographic area of the
hospital,” the language leaves substantial discretion to the
Secretary in determining what constitutes both the “relative wage
level” and the relevant “geographic area.” Cf. Bellevue Hosp.
23
Ctr., 443 F.3d at 174. The Court must therefore proceed to the
second step of Chevron to consider whether the Secretary’s policy
of excluding data from reclassified hospitals from the
calculation of plaintiffs’ wage indexes was based on a
“permissible construction” of § 1395ww(d)(3)(E)(i).
C. The Secretary’s Interpretation is Reasonable
Having concluded that the statute does not address the
precise question at issue, the Court must consider whether the
Secretary’s interpretation of § 1395ww(d)(3)(E)(i) was
reasonable and, if so, must defer to that interpretation. See
Chevron, 467 U.S. at 843. Plaintiffs rely primarily on the
Secretary’s decision to implement the “hold harmless” provision
for FY 2002 in arguing that the agency’s prior practice of
excluding the wage data of reclassified hospital was based on an
impermissible construction of § 1395ww(D)(3)(E)(i). Put
differently, plaintiffs claim that because the Secretary was able
to effectuate the change in wage-index calculation without a
change to the statutory or regulatory framework, the statute must
have already required the inclusion of reclassified hospitals as
part of the “geographic area.”
The Secretary responds that because the statute is silent as
to the inclusion of reclassified hospitals’ wage data, the agency
was not only permitted to change its practice but was required to
do so when information gained through the administration of the
24
program led the Secretary to conclude that inclusion of the data
was the preferable approach. Here the Secretary relies on a long
line of cases, including Chevron, recognizing that an agency
should not be prevented from adapting its policies when
circumstances counsel in favor of such a change. See Def.’s S.J.
Mem. at 23 (citing cases). Indeed, the Supreme Court in Chevron
made this point particularly clearly:
An initial agency interpretation is not instantly
carved in stone. On the contrary, the agency, to
engage in informed rulemaking, must consider varying
interpretations and the wisdom of its policy on a
continuing basis. Moreover, the fact that the agency
has adopted different definitions in different contexts
adds force to the argument that the definition itself
is flexible, particularly since Congress has never
indicated any disapproval of a flexible reading of the
statute.
467 U.S. at 863-64; see also Smiley v. Citibank (South Dakota)
N.A., 517 U.S. 735, 742 (2001) (“[T]he mere fact that an agency
interpretation contradicts a prior agency position is not fatal.
. . . [C]hange is not invalidating, since the whole point of
Chevron is to leave the discretion provided by the ambiguities of
a statute with the implementing agency.”).
The Court rejects plaintiffs’ attempt to fault the Secretary
for doing precisely what the Chevron Court envisioned –
evaluating “the wisdom of [the agency’s] policy on a continuing
basis.” Indeed, the Federal Register passages repeatedly
referenced and discussed by the parties make clear that the
Secretary carefully considered whether the Medicare statute
25
should be interpreted to include a “hold harmless” provision for
urban hospitals. The Secretary originally rejected this
interpretation because of the concern that including reclassified
hospitals in their original labor markets would (1) disrupt the
statutory scheme, which specifically enumerated the circumstances
under which reclassified hospitals should be included in the
calculations of their originating geographic area; and (2)
negatively impact the majority of hospitals by requiring that the
overall standardized rate be reduced to comport with a budget-
neutrality requirement contained in the statute. See 56 Fed.
Reg. at 43221.
When the agency reevaluated this interpretation in 2001, its
rationale for doing so was clearly explained. The Secretary
noted that including the data of reclassified hospitals in “the
MSA where the hospital is physically located . . . . improves
consistency and predictability in hospital reclassification and
wage indexes, as well as alleviates the fluctuations in the wage
indexes due to reclassifications.” 66 Fed. Reg. at 39865.
Moreover, the Secretary explained that reclassified hospitals may
continue to compete for labor with the other hospitals in their
MSA, and that their higher wages could pressure neighboring
hospitals to increase their wages accordingly. Id. at 39866.
These considerations, in addition to the conclusion that the
Secretary had the authority to make this change through
26
rulemaking, found support in the MedPAC Report which was cited
and discussed in the proposed rule.
Plaintiffs repeatedly assert that only the Secretary’s 2001
interpretation is reasonable, but they fail to point to anything
about the agency’s prior interpretation of the statutory scheme
that was either unreasonable or arbitrary.10 As noted above, the
mere fact that the agency reevaluated the impact of its policy
and changed its practice does not render the prior interpretation
unreasonable. It is also significant that – despite a number of
congressional amendments to 42 U.S.C. § 1395ww(d) during the
period that the agency enforced its policy of excluding
reclassified hospitals from the calculation of the wage indexes
of the urban areas in which those hospitals were physically
located – Congress never questioned or otherwise addressed the
policy. See Chevron, 467 U.S. at 864 (pointing out that
Congress’s failure to “indicate[] any disapproval of a flexible
reading of the statute” supports the conclusion that “the
definition itself is flexible”). Because the Court concludes
that the Secretary’s policy of excluding reclassified hospitals
10
Plaintiffs focus on a few particular words in the 2001
Federal Register notice, claiming that the Secretary’s choice of
words either (1) proves that the Secretary knew its prior
practice was unlawful, and/or (2) constitutes an admission under
the Federal Rules of Evidence. Defendant’s briefing persuasively
demonstrates why these arguments are utterly lacking in merit,
and the Court will not address plaintiffs’ contentions any
further.
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from plaintiffs’ wage-index calculations constituted a
permissible construction of the statute, the Secretary’s
interpretation is entitled to deference. Therefore, plaintiffs’
challenge under 5 U.S.C. § 706(2)(C) fails.
D. Additional Claims
Plaintiffs also contend that the Secretary’s exclusion of
reclassified hospitals from the wage index calculations in FY
2000 and 2001 (1) violated 42 C.F.R. § 413.5(b)(3); (2) was
arbitrary and capricious in violation of 5 U.S.C. § 706(2)(A);
and (3) violated plaintiffs’ rights to equal protection.11 These
arguments are not well-developed in the parties’ submissions and,
as explained briefly below, are without merit.
Section 413.5(b)(3) of Title 42 of the Code of Federal
Regulations is a regulation which states “[i]n general terms”
that one goal of reimbursement should be to create “a division of
the allowable costs between the beneficiaries of [the Medicare]
program and the other patients of the provider that . . . is fair
to each provider individually.” Plaintiffs conclusorily state
that the Secretary’s challenged policy was unfair to the
11
Plaintiffs state that defendant’s policy violates “the
Equal Protection Clause,” but never specify what constitutional
provision this claim is based upon. The Equal Protection Clause
of the Fourteenth Amendment to the U.S. Constitution does not
apply to the federal government. Therefore, any constitutional
claim against defendant based on equal protection principles
would be cognizable only under the Due Process Clause of the
Fifth Amendment.
28
individual hospitals, but fail to explain how or why this
particular regulation applies in the present case or how the
regulation confers any enforceable legal rights upon plaintiffs.
For these reasons, the Court rejects this claim.
Despite the distinct legal standards, plaintiffs make one
combined argument that the Secretary’s policy (1) was arbitrary
and capricious and (2) violated their constitutional rights to
equal protection. With respect to the claim based on 5 U.S.C.
§ 706(A)(2), plaintiffs argue that the Secretary failed to
fulfill the statutory purpose of § 1395ww(d)(3)(E)(i) and that
the negative impact on plaintiff hospitals renders the
Secretary’s practice arbitrary and capricious. See Pls.’ Mem. at
22-24. The D.C. Circuit has recognized that the arbitrary and
capricious standard often “overlaps” with the second step of
Chevron, because “whether a statute is unreasonably interpreted
is close analytically to the issue whether an agency’s actions
under a statute are unreasonable.” Shays v. Fed. Election
Comm’n, 414 F.3d 76, 96 (D.C. Cir. 2005) (alteration and internal
quotation marks omitted)). Here, plaintiffs’ arguments under the
arbitrary and capricious standard map directly onto the arguments
that this Court has already addressed and rejected in discussing
the Secretary’s interpretation of 42 U.S.C. § 1395ww(d)(3)(E)(i).
These arguments need not be revisited.
Finally, as the Secretary points out, an equal protection
29
challenge to the Medicare regulations is appropriately evaluated
under the rational-basis standard. See Clinton Mem. Hosp. v.
Sullivan, 783 F. Supp. 1429, 1440 (D.D.C. 1992) (applying a
“deferential standard” to an equal protection challenge to a
Medicare regulation, and explaining that “the challenged statute
or regulation will be struck down only if it ‘manifests a
patently arbitrary classification, utterly lacking in rational
justification’” (quoting Weinberger v. Salfi, 422 U.S. 749, 768
(1975))), aff’d sub nom. Clinton Mem. Hosp. v. Shalala, 10 F.3d
854, 860-61 (D.C. Cir. 1993). Plaintiffs contend that there was
no valid reason to treat urban and rural hospitals differently,
or to reimburse similarly situated hospitals at different levels
before and after FY 2002. They do not challenge, however, the
Secretary’s proffered justifications for distinguishing between
urban and rural hospitals or for not applying the change in the
calculation of the wage indexes retroactively. Indeed,
plaintiffs do not address their equal protection claim at all in
their reply brief. And because the Secretary’s proffered reasons
“sufficient to justify any disparate treatment,” id., plaintiffs’
constitutional claim must fail.
IV. CONCLUSION
Accordingly, for the reasons stated, the Court GRANTS
defendant’s motion for summary judgment and DENIES plaintiffs’
motion for summary judgment. An appropriate Order accompanies
30
this Memorandum Opinion.
Signed: Emmet G. Sullivan
United States District Judge
August 26, 2009
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