§ 1395 oo (f). The Secretary has the responsibility to provide the public with sufficient factual findings and articulated policy support to permit the court to understand the rational basis of the decision. Diplomat Lakewood, Inc. v. Harris, 198 U.S. App. D.C. 276, 613 F.2d 1009, 1018 (D.C. Cir. 1979). The issue presented under the arbitrary and capricious rubric is whether the court can find the Secretary "gave 'reasoned consideration to the problem'" of overreimbursement for malpractice costs. Diplomat Lakewood, supra at 1019, citing National Association of Food Chains, Inc. v. ICC, 535 F.2d at 1316 (D.C. Cir. 1976).
The plaintiffs argue that the Malpractice Rule is arbitrary, capricious and an abuse of discretion on many grounds: the rule results in bizarre consequences; it is anathema to sound public policy; it was promulgated without any evidentiary basis; and it imposes an extreme administrative burden.
First, the plaintiffs contend that the rule results in bizarre consequences since some hospitals will be reimbursed for a high percentage of malpractice costs and others -- even with a large population of Medicare patients -- will be reimbursed at only the national ratio figure of 5.1%. Thus, the reimbursement scheme bears no logical relation to the rate of Medicare patients using the "service" of guaranteed protection against malpractice risk. This contention is not completely accurate. By averaging the five-year paid claims experience of a hospital, the Secretary is attempting to peg reimbursement to the malpractice experience of a hospital and the actual risk that the hospital will have claims lodged against it. The Malpractice Rule does not gauge reimbursement by premium cost. However, the Secretary is not required to adhere to accepted industry practices in promulgating regulations. See Richey Manor v. Schweiker, 221 U.S. App. D.C. 356, 684 F.2d 130 (D.C. Cir. 1982) (accounting and legal principles); American Medical Int'l v. HEW, 466 F. Supp. 605 (D.D.C. 1979) (accounting principles).
Second, the plaintiffs argue that the Malpractice Rule runs counter to the public welfare because it encourages providers simply to pay Medicare claims but to fight all non-Medicare claims. Additionally, the plaintiffs contend that providers are deterred from reducing the frequency and severity of injuries to Medicare patients because of the financial loss which will result if no malpractice claims are paid. The court must believe that there will be a good faith acceptance of this regulation on behalf of the medical community: providers will continue to offer the highest possible quality of care and insurers will handle all claims in an equitable fashion.
Third, the plaintiffs argue that there is no valid evidence to support the Secretary's underlying assumptions; the Malpractice Rule is therefore based on irrational classifications and must be invalidated. The plaintiffs rely on (1) affidavits submitted testifying to the invalidity and inaccuracy of the conclusions in the government's primary statistical support, the Westat Report (plaintiffs' exhibit 15); and (2) an internal study demonstrating that G & A costs balanced out only when malpractice costs were included (plaintiffs' exhibit 26).
The statistical weaknesses of the Westat Report do not undermine the government's premise that the reimbursement of malpractice costs was borne disproportionately by the government before the promulgation of the Malpractice Rule. The major criticism leveled by the plaintiffs is that the national ratio figure of 5.1% is unsound because of the statistical inaccuracy of the report which produced that figure. However, over the long term, few facilities will be reimbursed according to this figure.
The plaintiffs contend that even assuming that malpractice costs for Medicare patients were overreimbursed, considered alone, this does not indicate that the government was actually overreimbursing since all G & A costs balance out in the cost centers. By discrete costing only malpractice costs, the plaintiffs argue, the government upsets the reimbursement balance in the cost center. Although the administrative record discloses that the discrete-costing of all items in a particular hospital would result in greatly increased costs for Medicare,
the administrator retains significant discretion to realign reimbursement methods. The Secretary need only guarantee that reimbursement determinations reflect the cost actually incurred by Medicare patients. Presbyterian Hospital of Dallas v. Harris, 638 F.2d 1381 (5th Cir. 1981). If the Secretary fulfills this responsibility, malpractice costs may be removed from the G & A cost center, and the remaining G & A costs may be reimbursed on an overall utilization rate basis.
Fourth, the plaintiffs believe that the Malpractice Rule threatens the risk management services provided by hospitals, since some of these services are included in insurance premium payments and would not be reimbursed under the Malpractice Rule. An adjustment in insurance billing practices could resolve this industry-related problem. Like many of plaintiffs' objections to the regulation, the problem of the arbitrary reimbursement of risk management expenses springs from a lack of uniformity in industry practices. The Secretary is under no responsibility to conform to industry custom, or to guarantee that Medicare reimbursement will accommodate industry procedures. Richey Manor v. Schweiker, supra.
While it is true that the hospital and insurance industries will be required to shoulder a greater administrative burden at the outset, and calculate the Medicare paid claims history in each hospital over the past four years, this hurdle is only temporary. Furthermore, it is not so unreasonable as to render the regulation arbitrary and capricious. The record does not provide substantial evidence that the new regulation will raise premium rates and disrupt the insurance industry. Abstractly, the regulation may inject more uncertainty into the insurance industry respecting the financial ability of an individual hospital to assume more of its malpractice costs. However, premiums should not be affected in any significant way, since the hospitals are facing no increased risk.
III. The Medicare Act
Under the Medicare Act, 42 U.S.C. § 1395x(v)(1)(A), the Medicare program must reimburse the "reasonable cost" of medical services, which includes "the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services."
The plaintiffs argue that the Malpractice Rule violates the statutory mandate because it fails to reimburse the reasonable direct and indirect costs "actually incurred" by providers, thereby shifting these costs to non-Medicare patients. In addition, the plaintiffs contend that the regulation is invalid because the Secretary failed to consider third-party payor practices when drafting the rule.
A. Standard of Review
Under the Social Security Act Congress entrusted to the Secretary rather broad authority to regulate cost reimbursement to providers under the health care programs. Courts have consistently held that deference should be given the Secretary's decision in these matters, and that they "should be upheld if [they are] reasonably consistent with the statute." Richey Manor, Inc. v. Schweiker, 221 U.S. App. D.C. 356, 684 F.2d 130, 134 (D.C. Cir. 1982).
B. Reasonable Costs
A threshold issue is whether malpractice costs are necessary or whether the Secretary has the discretion to deem them nonreimbursable. The plaintiffs argue that the statute is clear: the Secretary must reimburse all reasonable, necessary costs both direct and indirect. The defendants reply that the Secretary must only reimburse those costs he finds "necessary to the delivery of care."
The defendants' argument tends to muddy the relatively clear language of the statute. The Secretary must reimburse malpractice costs if they are necessary to the efficient delivery of care. Malpractice costs are not "unnecessary", as the defendants imply, because a hospital may not function absent malpractice coverage.
The Secretary has, in effect, admitted that some malpractice costs are reimbursable.
In order to comply with the provisions of the Medicare Act, the Malpractice Rule must reimburse malpractice costs actually incurred in providing services to Medicare patients. The plaintiffs contend that this includes the costs of malpractice insurance as dictated by the insurance industry, according to the amount of risk exposure per patient day. But this formula fails to accommodate the Secretary's findings that Medicare patients present a lower risk than non-Medicare patients. The Secretary has considerable discretion to evaluate the cost incurred by Medicare patients, without reference to industry practices. See, Richey Manor v. Schweiker, 221 U.S. App. D.C. 356, 684 F.2d 130, 135 (D.C. Cir. 1982); American Medical Int'l v. HEW, 466 F. Supp. 605, 623 (D.D.C. 1979), aff'd, 219 U.S. App. D.C. 267, 677 F.2d 118. The defendants indicate that the Malpractice Rule attempts to more fairly apportion malpractice costs between Medicare and non-Medicare patients. Conceding that the Malpractice Rule may not achieve this objective in the most accurate fashion, the defendants rely on the Secretary's discretion, and the fact that during the notice and comment proceedings no alternative was proposed, to validate the final rule.
The court finds that the Secretary may legitimately attempt to strike a balance which more fairly apportions malpractice costs between the provider and the government. The compromise embodied in the Malpractice Rule presents a rationally-based attempt by the Secretary to reimburse only the necessary, reasonable costs of malpractice insurance according to the risk actually run by each individual provider. Although the rule does not adhere to the price-setting mechanisms in the insurance industry, the Secretary is free to develop independent practices.
The thorniest problem presented in this case is whether, by isolating malpractice costs from the other G & A costs, the burden of carrying both G & A and malpractice costs is impermissibly shifted onto non-Medicare patients. 42 U.S.C. § 1395x(v)(1)(A).
1. Malpractice Costs
The plaintiffs contend that the reduction in reimbursement of malpractice costs under the rule impermissibly shifts these costs onto non-Medicare patients. The plaintiffs point to their own record, clear of malpractice payouts, and argue that the government will only reimburse Boswell at 5.1% of its total malpractice costs, although Medicare occupancy at the hospital exceeds 80%. Since its malpractice premiums have not been altered, the low percentage of non-Medicare patients must carry the difference.
The defendants argue that the additional malpractice costs, since they are not recognized as costs of the program, are therefore unnecessary and cannot be shifted. However, the Secretary has admitted that some proportion of these costs are necessary and should be reimbursed. The relevant question, therefore, is whether the percentage of the malpractice costs incurred by hospitals for care of Medicare patients must be reimbursed at a different rate than that determined under the Malpractice Rule.
The premise of the paid-claims basis for the Malpractice Rule is that over a five-year period, each hospital will be reimbursed according to actual malpractice liability. Although Boswell is only reimbursed for 5.1% of malpractice expenses in one year, the payout of one Medicare malpractice claim may mean complete malpractice reimbursement in the next year.
Over the long run, Medicare will shoulder its share of malpractice insurance costs.
b. General and Administrative Costs
The plaintiffs also claim that the Malpractice Rule, by removing malpractice costs from the G & A cost centers, upsets the presumption that costs incurred by Medicare patients will balance out when aggregated in the cost centers and reimbursed according to the utilization rate.
The court accepts the defendants' argument that the various costs accumulated in the G & A cost centers are not demonstrably more attributable to Medicare than non-Medicare patients. When the Secretary discovered that malpractice costs were overreimbursed, the presumption that all G & A costs balanced out evaporated. Until evidence is provided that other costs are improperly reimbursed, the Secretary is entitled to discrete cost malpractice insurance costs, and preserve the presumption that the other G&A costs balance out in the cost center.
D. Third-Party Payor
Finally, the plaintiffs contend that the government violated the Medicare Act by failing to consider third-party payor principles in promulgating the rule. The rulemaking record in this case is replete with testimony by providers that malpractice insurance costs are reimbursed according to the utilization rate by other third-party payors. The Secretary generated no internal record to indicate these principles were considered, however, it is difficult for the court to imagine that the Secretary completely failed to consider the third-party payor practices. The Secretary was aware that the new policy did not conform to third-party payor practices, and chose to proceed with the rulemaking.
The Secretary's decision to promulgate the Malpractice Rule was based on a reasonable belief that Medicare was overreimbursing providers for malpractice costs relative to the malpractice risk actually posed by Medicare patients. A study covering 84% of all closed claims over a four month period revealed overreimbursement under the utilization rate formula. The Secretary relied on this study to develop a program which reimburses providers based on actual loss experience. While it is true that this new rule does not conform to industry practices, it is not irrational. The Secretary rendered a decision based on sound assumptions with factual support. The court cannot find that the rulemaking was arbitrary, capricious or an abuse of the Secretary's discretion, or that the regulation violates the letter or spirit of the Medicare Act.
For the reasons stated in the accompanying memorandum opinion, it is hereby
ORDERED that the plaintiffs' motion for summary judgment is denied; it is
FURTHER ORDERED that the defendants' motion for summary judgment is granted.