reimbursed under the reasonable cost method, adjusted by an inflation factor. 42 U.S.C. § 1395ww(d) (I) (A) (i) (I); 42 U.S.C. § 1395ww(b) (3) (A). This fiscal year is known as the "base year;" for most hospitals, the base year used for calculating their "target amount" is 1982. Thus, as the Secretary notes, "the intermediary's determination of a hospital's allowable Medicare costs for 1982 serves two functions: (1) it establishes how much a hospital will be reimbursed for its 1982 costs; and (2) it provides one element in establishing a hospital's reimbursement rate for transition period years under the prospective payment system." Memorandum in Support of Defendant's Motion for Summary Judgment and in Opposition to Plaintiffs' Motion for Summary Judgment at 12.
During the transition period, the per discharge payment rate is determined by combining the target amount with an estimate of regional and national costs known as the "DRG prospective payment rate" or the "federal portion." The weight accorded to these two components varies during each of the four transition years; the federal portion constitutes 25 % of the rate for the first PPS year; 50 % for the second; 55 % for the third; and 75 % for the fourth. 42 U.S.C. § 1395ww(d) (1) (C) (i)-(iv), as amended by Pub. L. No. 99-272, § 9102 (April 7, 1986). After the fourth year, the prospective payment rate will be based exclusively on the federal portion.
This case requires the court to determine the standard of review for an intermediary's determination of an individual hospital's "target amount" during the PPS transition period. Under the Secretary's regulations, the Medicare intermediaries must use the "best data available" to determine the target amount component of a hospital's PPS rate before the beginning of that hospital's first PPS year. 42 C.F.R. § 412.71(d). These regulations also provide that the intermediary's determinations are "final and may not be changed after the first day" of the hospital's first PPS year except in the limited circumstances set forth in 42 C.F.R. § 412.72. See id. Section 412.72 (a) (3) provides that if a provider obtains a final court decision recognizing additional costs as "allowable" for its base year, then that provider may also incorporate these additional costs in its target amount but only for PPS years beginning after the date of the decision. This rule is termed the "prospective relief regulation" by the defendant.
In earlier litigation, the Secretary apparently took the position that the "prospective" relief provided by § 412.72 (a) (3) was the sole remedy available to a hospital whose intermediary mistakenly excluded "allowable" costs from its target amount. See Charter Medical Corp. v. Bowen, 788 F.2d 728, 734-35 (11th Cir. 1986); St. Francis Hospital v. Heckler, CCH Medicare and Medicaid Guide, para. 34,918 (S.D.W.Va. 1985), reversed on jurisdictional grounds sub nom. St. Francis Hospital v. Bowen, 802 F.2d 697 (4th Cir. 1986). The Secretary now argues, however, that the "prospective relief regulation" applies only to successful appeals of base year costs and does not preclude a hospital from obtaining "retroactive" relief for cost reporting years beginning before the final decision on its allowable base year costs by filing a separate appeal for the PPS year in question. However, according to the Secretary, the standard of review in such a proceeding is limited to determining whether the intermediary used "the best data available at the time" the target amount was set. The plaintiff may recover for the error of an intermediary only if its estimation "was unreasonable and clearly erroneous in light of the data available at the time the estimation was made." 42 C.F.R. § 412.72(b).
The case of Greater Southeast Community Hospital ("Greater Southeast") provides an example of the defendant's approach. Greater Southeast appealed its intermediary's determination that its intermediate care unit was not properly classified as a special care unit. This court, per Judge Gesell, ruled in favor of Greater Southeast for the 1977-80 cost reporting years and the parties subsequently entered into a stipulation applying Judge Gesell's decision to the 1981 and 1982 years as well. See Greater Southeast Community Hospital v. Heckler, 602 F. Supp. 764, 766-67 (D.D.C. 1985). Thus, Greater Southeast has obtained a final and binding decision that its intermediary made an error in calculating its base year costs, i.e., the costs used to calculate the target amount component of its reimbursement under PPS. Pursuant to 42 C.F.R. § 412.72 (a) (3), defendant has agreed to adjust Greater Southeast's target amount for all PPS years occurring after Judge Gesell's 1985 decision.
However, defendant contends that Greater Southeast can recover for damages resulting from the intermediary's error in PPS years beginning before that decision only if it can show that the intermediary's determination was unreasonable in light of the "data" before it.
Plaintiffs contend that the standard of review proposed by the Secretary is arbitrary and capricious and not in accordance with existing law. According to plaintiffs, "the plain wording of the Medicare statute makes absolutely clear that the correct standard is whether the intermediaries' determinations were right, not whether they were good faith judgments based on the best evidence available at the time." Memorandum in Opposition to Defendant's Motion for Summary Judgment and in Further Support of Plaintiffs' Motion for Summary Judgment at 3. In this case, the plaintiffs have already obtained court judgments that demonstrate that their intermediaries were wrong with respect to the issues under appeal. These judgments, plaintiffs argue, entitle them to relief for the PPS years under appeal. In the alternative, plaintiffs argue that even if the Secretary's standard of review is applied, they are entitled to judgment on appeal because their intermediaries' determinations on their allowable costs were not based on the "best available data."
Before turning to consider the plaintiffs' challenge to the standard of review adopted by the defendants, it is necessary to consider briefly the claims advanced by the individual defendants. The appeals of these 12 hospitals raise four distinct issues which are discussed in turn below.
First, plaintiff Greater Southeast has challenged the Secretary's decision not to treat its intermediate care unit as a "special care unit" in determining its target amount. As noted above, a previous (and final) decision of this court determined that the hospital's unit qualifies as a special care unit. See Greater Southeast Community Hospital v. Heckler, 602 F. Supp. 764, 766-67 (D.D.C. 1985). As a result of that decision, Greater Southeast received reimbursement for its 1982 fiscal year, the base year for its PPS target amount and "collateral" relief under § 412.72 (a) (3) for PPS transition years beginning on or after January 1, 1986. However, the Secretary refused to grant relief for Greater Southeast's first and second PPS years.
Second, Beebe Hospital of Sussex County, Inc. ("Beebe") has challenged the Secretary's refusal to exclude labor/delivery room days from the inpatient count in determining its allowable base year costs. The Court of Appeals for this Circuit has issued a final decision ruling against the Secretary on the labor/delivery room day issue in an action in which Beebe was one of the plaintiffs. See St. Mary of Nazareth Hospital Center v. Heckler, 245 U.S. App. D.C. 287, 760 F.2d 1311 (1985); see also St. Mary of Nazareth Hospital Center v. Schweiker, 231 U.S. App. D.C. 47, 718 F.2d 459 (1983); Stormont Vail Regional Medical Center v. Bowen, 645 F. Supp. 1182 (D.D.C. 1986). On April 27, 1987, the Secretary issued a ruling (HCFAR 87-3) announcing that the Health Care Finance Administration ("HCFA") would follow the St. Mary decision in all claims filed in the D.C. Circuit. 52 Fed. Reg. 13873-74. On May 27, 1987, the Secretary agreed to a stipulation in Beebe Hospital of Sussex County, Inc., et al. v. Otis R. Bowen, No. 87-0409, resolving the labor/delivery room day issue in favor of the plaintiffs for all cost reporting years under appeal, including the "base year" of plaintiff Beebe.
Eight hospitals, Georgetown University Hospital ("Georgetown"), Greater Southeast, Tucson Medical Center ("TMC"), St. Cloud Hospital ("St. Cloud"), Howard University Hospital ("Howard"), Tucson General Hospital ("TGH"), Capitol Hill Hospital ("Capitol Hill") and District of Columbia General Hospital ("D.C. General") have challenged the Secretary's application of a wage index formula that excludes federal government hospital data in determining allowable base year costs. The wage index used by the Secretary was invalidated on procedural grounds in District of Columbia Hospital Ass'n, et al. v. Heckler, et al., No. 82-2520 (D.D.C. April 29, 1983) (" DCHA "). No appeal was taken from this ruling. However, in 1984, the Secretary reissued his wage index rule and gave this new rule retroactive effect.
The Court of Appeals for this Circuit has recently determined that the Secretary's actions in issuing a retroactive rule were precluded by both the Administrative Procedure Act and the Medicare Act. See Georgetown University Hospital v. Bowen, 261 U.S. App. D.C. 262, 821 F.2d 750 (1987) (" Georgetown I "). Thus, it is clear that the plaintiffs' fiscal intermediaries erred in using the Secretary's wage index formula to calculate plaintiffs' target amounts. Moreover, at the time the target amounts were set, DHGA had already been decided and the retroactive wage index rule had not yet been promulgated. Thus, as the Secretary acknowledges, these determinations were clearly wrong at the time that they were made. See Reply in Support of Defendant's Motion for Summary Judgment at 20.
All plaintiffs except Capitol Hill and D.C. General were plaintiffs in the Georgetown I case. These two plaintiffs did not participate in that action because the wage index issue had no financial impact on their base year even though it does have an impact on the target amount component of their PPS rates. With respect to Capitol Hill, its Medicare intermediary failed to apply the 1984 retroactive rule to the hospital's base year cost report although it did apply the rule in determining the target amount component of the PPS rate. As to D.C. General, the intermediary determined that its charges for its base year were below its costs, regardless of which wage index was used to determine "allowable costs." While the wage index issue therefore did not affect the reimbursement received by D.C. General for its base year, the issue is relevant to the target amount component of D.C. General's PPS rate since that amount is calculated using "allowable costs" without reference to actual charges. See 42 U.S.C. § 1395ww.
Finally, nine hospitals, George Washington University Hospital ("George Washington"), Georgetown, Greater Southeast, Howard, Capitol Hill, D.C. General, Beebe, the Washington Hospital Center and Kent General Hospital ("Kent") have challenged the Secretary's application of 42 C.F.R. § 405.452(b) (1) (ii) (1979) ("the Malpractice Rule") and the Secretary's refusal to apply the utilization methodology in effect before that regulation was passed in determining the allowable base year malpractice costs. All nine plaintiffs have received a favorable court judgment invalidating the Malpractice Rule and ordering payment under the utilization methodology for their base years. See Walter O. Boswell Memorial Hospital v. Heckler, 628 F. Supp. 1121 (D.D.C. 1985). This decision was appealed by the defendant. On April 1, 1986, the defendant promulgated a malpractice rule that applies retroactively to cost reporting years beginning as early as 1979. The Court of Appeals recently declined to rule on the defendant's suggestion that this action rendered the malpractice litigation moot, and it remanded the case to the district court to consider the validity of the promulgation and application of the 1986 rule. The case is currently pending before the District Court on remand.
All of these plaintiffs seek to have the target amount component of their PPS rates readjusted on the basis of the court decisions described above which, according to plaintiffs, demonstrate that their intermediaries erred in determining their "allowable" costs. Defendant argues that they may prevail only if they can show that their intermediaries failed to rely on the "best data available" at the time their target amounts were set.
In Washington Hospital Center v. Bowen, 254 U.S. App. D.C. 94, 795 F.2d 139 (1986), the Court of Appeals recently discussed the role of the courts in reviewing the Secretary's construction of the Medicare statute. The court noted that the first task "is to determine 'whether Congress has directly spoken to the precise question in issue. If the intent of Congress is clear, that is the end of the matter.'" Id. at 143 (quoting Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984)). In determining the intent of Congress, the court must examine both the statutory language and the legislative history; no particular deference is due to the agency's own interpretation of these sources. 795 F.2d at 143-44.
In this case, both the words of the statute and its legislative history support the standard of review proposed by the plaintiffs. The Medicare statute defines a provider's "target amount" during the transition period as "the allowable operating costs [per discharge] of inpatient hospital services" for the base year, adjusted by an inflation factor. 42 U.S.C. § 1395ww(b) (3) (A). The plain language of the statute therefore provides that costs that are "allowable" for a hospital's base year must be included in the calculation of that hospital's "target amount." When reviewing an intermediary's determination of the target amount, the Court must consider whether the costs in question were "allowable" in the base year. A final administrative or judicial decision (or a stipulation by the Secretary) that a particular cost was, indeed, "allowable" in the base year should provide conclusive proof that the cost should be included in the provider's "target amount" for the PPS year under appeal. The Court of Appeals for this Circuit implicitly recognized the effect of a ruling under the reasonable cost system on a provider's reimbursement during the PPS transition period when it stated, in Walter O. Boswell Memorial Hospital v. Heckler, 242 U.S. App. D.C. 110, 749 F.2d 788, 791 n.3 (1984), that
Reimbursements for costs reported between October 1, 1983, and October 1, 1986, depend in part upon a hospital's costs under the "reasonable cost" system, 42 U.S.C.A. § 1395ww(a) (4), (b) (3) (A), (d) (1) (A) (1983), and thus will be affected by whether the Malpractice Rule is valid.
Similarly, the eleventh circuit assumed, in Charter Medical Corp. v. Bowen, 788 F.2d 728, 735 (1986), that "plaintiffs are entitled to full retroactive relief for all damages caused by erroneous prospective payment rates."
The judicial review provisions of the statute provide further evidence that Congress intended to afford "full retroactive relief" to hospitals which are injured by an intermediary's failure to include "allowable" costs in their transition period PPS rates. The Medicare statute was expressly amended to furnish hospitals with the same procedures for administrative and judicial review under PPS as under the cost reimbursement system. 42 U.S.C. § 1395oo, as amended by Pub. L. No. 98-21, § 602(h). That statute contains provisions relating to the scope of evidence and the standard of judicial review that are directly relevant here. 42 U.S.C. § 1395oo (d) provides that
A decision by the Board shall be based upon the record made at such hearing, which shall include the evidence considered by the intermediary, and such other evidence as may be obtained or received by the Board, and shall be supported by substantial evidence when the record is viewed as a whole.