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November 16, 1987

Georgetown University Hospital, et al., Plaintiffs,
Otis R. Bowen, Secretary of Health and Human Services, Defendant; George Washington University Hospital, et al., Plaintiffs, v. Otis R. Bowen, Secretary of Health and Human Services, Defendant

Louis F. Oberdorfer, United States District Judge.

The opinion of the court was delivered by: OBERDORFER


 Plaintiffs are not-for-profit hospitals that furnish inpatient services to Medicare beneficiaries and receive payments for these services from the Department of Health and Human Services. In these consolidated actions, they seek review of the payment amounts that were set by their fiscal intermediaries for their first two cost reporting years under the new Prospective Payment System ("PPS"). *fn1" A Memorandum and Order dated May 29, 1986, denied defendant's motion to remand these proceedings to the Provider Reimbursement Review Board ("PRRB" or "the Board"). The case is currently before the court on cross motions for summary judgment.


 As a preliminary matter, defendant's renewed suggestion that this court lacks jurisdiction over plaintiffs' claims warrants a brief description of the Medicare appeals process and a review of the procedural history of this case. 42 U.S.C. § 1395oo(a) provides that a hospital that is dissatisfied with a final payment determination of its fiscal intermediary may appeal that determination to the PRRB. Because the Board lacks the authority to rule on particular issues (e.g., the legality of an agency regulation), see 42 C.F.R. § 405.1867, a hospital that has filed an appeal under 42 U.S.C. § 1395oo may request a determination of the Board's authority to decide the issues raised by that appeal. 42 U.S.C. § 1395oo(f) (1). By statute, the Board has thirty days to consider this request (commonly known as an expedited judicial review petition). Id. If the Board determines that it lacks the authority to decide the issue, or if it fails to render any decision on the hospital's petition by the end of the 30 day period, the hospital has sixty days to file a civil action to determine the issues raised in its appeal. Id.

 The twelve hospitals in these actions all appealed to the PRRB upon receiving final notices from their intermediaries of the PPS reimbursement rates for their first PPS cost reporting years. The Board denied jurisdiction over their claims based on HCFAR 84-1, a ruling issued by the Secretary that held that hospitals must wait until they receive a notice of program reimbursement ("NPR") to file an appeal for a PPS year. The hospitals appealed the Board's jurisdictional ruling to this court, arguing that HCFAR 84-1 was inconsistent with 42 U.S.C. § 1395oo(a), the statute governing PRRB appeals. In Tucson Medical Center v. Heckler, 611 F. Supp. 823 (D.D.C. 1985), aff'd sub nom. Washington Hospital Center v. Bowen, 254 U.S. App. D.C. 94, 795 F.2d 139 (1986), this court invalidated HCFAR 84-1, declared that "the Board has jurisdiction over the appeals of the plaintiffs under the prospective payment system" and remanded for "the expeditious processing" of those appeals. See id. 611 F. Supp. at 827. Upon remand, plaintiffs filed appeals for their second PPS years and petitioned for expedited judicial review pursuant to 42 U.S.C. § 1395oo(f) (1). The Board failed to rule on these expedited judicial review petitions within the 30 day period allowed by the statute. Plaintiffs therefore filed these actions within 60 days of the expiration of the 30 day period to litigate the merits of their claims regarding their payment amounts under the PPS system.

 The Secretary acknowledges, as he must, that plaintiffs petitioned for expedited judicial review and that the Board failed to act upon these requests within the 30 day time period. See Answer in Georgetown University Hospital v. Bowen at 2 (admitting the allegations in paras. 19-21 of the complaint). Nonetheless, he contends that this court lacks subject matter jurisdiction over the plaintiffs' claims because the Board failed to evaluate its own jurisdiction over these claims upon remand, an action that the Secretary argues is a prerequisite to consideration of any petition for expedited review. See 42 C.F.R. § 405.1842(b) (2).

 This argument ignores the prior history of this case. As noted above, the Board's initial determination that it did not have jurisdiction over these appeals was explicitly reversed by this court in Tucson Medical Center v. Heckler, 611 F. Supp. 823 (D.D.C. 1985). On remand, no stay of the court's order was sought by the defendant. Therefore, at the time plaintiffs' petitions for expedited review were filed, the Board's jurisdiction had been established; no jurisdictional question remained for the Board to "consider." *fn2" Under these circumstances, the Board's unwarranted refusal to abide by an explicit court order directing it to process the appeals (or to seek a stay from the effect of that order) can not now be used by the defendant as a means to further delay the resolution of these plaintiffs' claims.


 Plaintiffs ' seek review of their rates of reimbursement for several cost reporting years under the new PPS system. Until October 1, 1983, hospitals that provided services covered under the Medicare program were reimbursed for the lesser of the "reasonable cost of such services" or the "customary charges with respect to such services." 42 U.S.C. § 1395f (b) (1982). The "reasonable cost" of a provider's services was determined by a fiscal intermediary after the close of the fiscal year, based on a "cost report" submitted by the provider. 42 C.F.R. § 405.406(b) (1983). Under the PPS, which applies to all cost reporting years beginning after October 1, 1983, hospitals are now paid a predetermined rate for each patient treated regardless of their actual operating costs. The amount of reimbursement received for an individual discharge depends, in part, on which of the approximately 470 "diagnosis related groups" ("DRGs") applies to that patient's diagnosis and treatment. 42 U.S.C. § 1395ww(d) (3). Each DRG is assigned a weight based on the expected cost of treating cases within that group. The amount of reimbursement received by the hospital is determined by multiplying this weight by a per discharge payment rate that is based on the average cost of treating a Medicare patient. See 42 C.F.R. § 412.60.

 By 1988, this per discharge payment will be a uniform national average. However, the Medicare Act provides for a four year transition period in order to minimize the disruption caused by the change in reimbursement policy. See H.R. Rep. No. 98-25, 98th Cong., 1st Sess. 136, reprinted in 1983 U.S. Code Cong. & Admin. News 355. During this transition period, an individual hospital's per discharge rate is determined by combining that hospital's own historical average costs with regional and national average costs. The portion of the rate that represents a hospital's historical average costs is known as the "target amount" or the "hospital specific portion." The Medicare statute defines this "target amount" as a hospital's "allowable operating costs [per discharge] of inpatient hospital services" for the fiscal year preceding the last fiscal year during which the hospital was 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. *fn3" 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 ...

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