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WALTER O. BOSWELL MEM. HOSP. v. HECKLER

November 19, 1985

WALTER O. BOSWELL MEMORIAL HOSPITAL, Plaintiff,
v.
MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants; HOWARD UNIVERSITY HOSPITAL, et al., Plaintiffs, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants; QUEEN'S MEDICAL CENTER, et al., Plaintiffs, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants; ALLENDALE COUNTY HOSPITAL, et al., Plaintiffs, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, Defendant; MEMORIAL HOSPITAL, Plaintiff, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants; GREATER SOUTHEAST COMMUNITY HOSPITAL, et al., Plaintiffs, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, Defendant; CENTRAL PENINSULA GENERAL HOSPITAL, et al., Plaintiffs, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants; BEEBE HOSPITAL, et al., Plaintiffs, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants; HOWARD UNIVERSITY HOSPITAL, et al., Plaintiffs, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants; GEORGE WASHINGTON UNIVERSITY HOSPITAL, et al., Plaintiffs, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants; HARTSELLE MEDICAL CENTER, INC., et al., Plaintiffs, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, Defendant; DANIEL FREEMAN HOSPITALS, INC., et al., Plaintiffs, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, Defendant; COUNTY OF LOS ANGELES, etc., Plaintiff, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, Defendant; MILFORD MEMORIAL HOSPITAL, Plaintiff, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, et al., Defendants; METHODIST HOSPITALS OF MEMPHIS, et al., Plaintiffs, v. MARGARET M. HECKLER, Secretary of the Department of Health and Human Services, Defendant



The opinion of the court was delivered by: BRYANT

 WILLIAM B. BRYANT, Senior United States District Judge.

 This action is before the court on both plaintiffs' and defendants' motions for summary judgment. For the reasons stated below, this court grants summary judgment for the plaintiffs, and denies defendants' motion.

 I. Introduction

 In 1979, the Secretary of the Department of Health and Human Services ("HHS") promulgated a regulation, commonly known as the Malpractice Rule, which altered the method by which hospitals are reimbursed for the malpractice insurance expenses they incur as a result of treating Medicare patients. *fn1" The issue before this court is whether the Malpractice Rule is valid. Specifically, several hospitals affected by the regulation claim, first, that the basis and purpose statement accompanying the Malpractice Rule is deficient under the Administrative Procedure Act ("APA"), 5 U.S.C. § 553(c) (1982); and second, that the Malpractice Rule is arbitrary and capricious in violation of both the APA, 5 U.S.C. § 706(2)(A) and (C) (1982), and the Medicare Act, 42 U.S.C. § 1395x(v)(1)(A) (1982). The hospitals request reimbursement under the reimbursement method which preceded the Malpractice Rule.

 In 1983, this court held the Malpractice Rule valid, however we did so without the benefit of the full rulemaking record. Walter O. Boswell Memorial Hospital v. Heckler, 573 F. Supp. 884 (D.D.C. 1983). The court of appeals reviewed that decision, and remanded to this court to reassess the hospitals' challenge to the Malpractice Rule in light of the full rulemaking record. 242 U.S. App. D.C. 110, 749 F.2d 788 (D.C. Cir. 1984). In its opinion, the court of appeals provided specific direction regarding how to determine the validity of the Malpractice Rule. Under the guidelines provided by the court of appeals, and in light of the full rulemaking record, the Malpractice Rule is invalid. *fn2"

 II. The Basis and Purpose Statement

 The APA requires the Secretary to consider comments submitted to her regarding a proposed rule, and to present a "concise general statement" of the rule's "basis and purpose". 5 U.S.C. § 553(c) (1982). The basis and purpose statement must,

 
enable us to see what major issues of policy were ventilated by the informal proceedings and why the agency reacted to them as it did.

 Boswell, 749 F.2d at 794, quoting Automotive Parts and Accessories Ass'n v. Boyd, 132 U.S. App. D.C. 200, 407 F.2d 330, 338 (D.C. Cir. 1968). The court of appeals specifically directed this court to examine the basis and purpose statement accompanying the Malpractice Rule, and to examine the comments submitted on the Rule, in order to determine whether the statement "provided sufficient insight into the issues raised," regarding three critical issues: (1) HHS's decision that reimbursement under the old definition of the "General & Administrative" cost pool subsidized non-Medicare patients at the expense of Medicare patients; (2) HHS's use of and reliance on the Westat study; and (3) HHS's consideration of a "separate-policies" alternative, and of other alternatives, to the Malpractice Rule. Id.

 1. The G&A Pool Imbalance

 HHS generally reimburses hospitals for their Medicare related expenses by pooling several of the hospital's expenses into the "General & Administrative" ("G&A") cost pool. HHS determines the percentage of the hospital's total medical services that are rendered to Medicare patients, and pays to the hospital that percentage of the amount in the G&A pool. Boswell, 749 F.2d at 794.

 HHS recognizes that some individual expenses which go into the pool are consumed in greater proportion by non-Medicare patients than by Medicare patients, and that other services are consumed in greater proportion by Medicare patients than by non-Medicare patients. But when all these individual expenses are pooled together, HHS has believed, these disproportions balance each other out, and the pooling method accurately reimburses hospitals for the services they provide to Medicare patients. Id. at 795.

 Malpractice insurance premiums formerly were one of the expenses pooled in the G&A pool. The Malpractice Rule removes this expense from the pool and reimburses it under a different formula. The Secretary acted to remove this expense because she concluded Medicare patients were recovering less in malpractice awards than non-Medicare patients, and that therefore Medicare was paying out too much in malpractice insurance reimbursements. But that conclusion alone does not justify removing malpractice insurance expenses from the pool.

 
The Secretary must have implicitly determined that the old G&A pool, taken as a whole, had come to subsidize non-Medicare patients at the expense of Medicare patients. Without such a determination, there would be no legitimate grounds for removing malpractice premiums from the G&A pool, since the old G&A pool had long been presumed to balance costs fairly between Medicare and non-Medicare patients.

 Boswell, 749 F.2d at 795 (emphasis in original).

 In its basis and purpose statement, HHS stated that "malpractice costs are so significant and the disproportionate allocation of malpractice costs to Medicare is so great", that a "unique exception" to the pooling method is warranted. 44 Fed. Reg. 31,642 (1979). The court of appeals found that while this conclusion supports removing malpractice expenses from the G&A pool, "the precise factual basis for this conclusion . . . remains obscure from the record before the district court." 749 F.2d at 795. Therefore, the court stated that,

 
HHS should direct the district court to the facts upon which HHS based its conclusion that malpractice premiums are so significant and disproportionate as to bias a once balanced G&A pool, so that the reviewing court may have some idea whether comments ventilated this important consideration and whether HHS responded to them adequately.

 Id.

 HHS has failed to direct this court to any facts which support its conclusion. HHS points to the rising costs of malpractice insurance and to the "common-sense observation" that Medicare patients, who are usually over sixty-five, tend to recover less in malpractice actions then younger patients with more future earnings potential. But both those facts were already before the court of appeals, which nonetheless found HHS's basis "obscure". Boswell, 749 F.2d at 795. To determine that the G&A pool as a whole was unbalanced by the rising cost of malpractice insurance, HHS must have examined,

 
whether other factors in the G&A pool changed during [the same] period, and what proportion malpractice premiums occupied in the pool at various times.

 Id. at 795 n.8. HHS has not indicated, nor do we find, that HHS ever undertook such an examination as a part of promulgating the Malpractice Rule. See Menorah Medical Center v. ...


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