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CLINTON MEM. HOSP. v. SULLIVAN

January 30, 1992

CLINTON MEMORIAL HOSPITAL, Plaintiff,
v.
LOUIS W. SULLIVAN, M.D., Secretary of Health and Human Services, Defendant.



The opinion of the court was delivered by: THOMAS A. FLANNERY

 This matter comes before the Court on plaintiff's Motion for Summary Judgment and Defendant's Motion for Summary Judgment. For the following reasons, plaintiff's motion will be denied and defendant's cross-motion will be granted.

 I.

 Plaintiff Clinton Memorial Hospital ("Clinton") challenges certain Medicare reimbursement regulations promulgated by the Secretary of Health and Human Services ("Secretary") pursuant to Title XVIII of the Social Security Act, 42 U.S.C. §§ 1395-1395ccc. Pursuant to 42 C.F.R. §§ 412.92(a)(3) & (b)(2), the Secretary denied Clinton "sole community hospital" ("SCH") status under the Medicare prospective payment system for the fiscal years 1985 through 1988. Clinton concedes the decision was proper under the regulations, but challenges the validity of these regulations on several grounds.

 A.

 In 1965, Congress enacted legislation, commonly known as the "Medicare Act," which established a federally-funded health insurance program for certain aged, blind, and disabled persons. Social Security Amendments of 1965, P.L. 89-97, 79 Stat. 291 (codified as amended at 42 U.S.C. §§ 1395, et seq.). The Medicare Act program provides payment for medical care and services -- including inpatient hospital care -- to those aged, blind, and disabled persons who qualify under Title II of the Act. 42 U.S.C. §§ 402, et seq. The Secretary administers the Medicare program through the Health Care Financing Administration ("HCFA"). 42 U.S.C. § 1395kk. The Secretary is authorized by statute to "proscribe such regulations as may be necessary to carry out the administration" of the Medicare program. Id. § 1395hh.

 Under the Medicare program, hospital providers enter into agreements with the Secretary under which the providers promise to render services to Medicare beneficiaries. Id. § 1395cc. The hospitals are then reimbursed for the provision of these services.

 1.

 Prior to 1983, a hospital provider was entitled to payment of the lesser of the "reasonable cost" or the "customary charge" of the services provided. 42 U.S.C. § 1395f(b) (1982). Reasonable costs was defined by statute as "the cost reasonably incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." Id. § 1395x(v)(1)(A). The Secretary was authorized to promulgate regulations "providing for the establishment of limits on . . . costs . . . to be recognized as reasonable." Id. § 1395x(v)(1).

 Pursuant to the authority granted him under the statute, the Secretary established estimated cost limits on allowable routine costs per day ("Routine Cost Limits"). 42 C.F.R. § 405.460(a)(2) (1982). *fn1" In addition, in recognition of congressional intent that routine Medicare cost limitations not be applied to the detriment of communities with limited access to hospitals, *fn2" the Secretary created the SCH exemption to the Routine Cost Limits for "a hospital which, by reason of factors such as isolated location or absence of other hospitals, is the sole source of such care reasonably available to beneficiaries." Id. § 405.460(e)(1). A hospital that meets the SCH criteria receives higher compensation from the government than hospitals that are not classified as a SCH.

 Due to the general nature of the regulation, the HCFA issued two Intermediary Letters ("I.L.") to guide its regional offices in determining whether a particular hospital qualified as a SCH. I.L. 74-22 set out in pertinent part:

 The determination that a hospital is the sole source of hospital services reasonably available to beneficiaries is based on such factors as (1) the normal commuting distance to work for residents of the locality served by the hospital, (2) travel time and availability of public transportation to the nearest like facility, and (3) the extent to which persons travel to other localities for hospital care. Generally, neither a hospital located within a 25-mile radius of a like facility . . . can be found to qualify for a sole community hospital exemption.

 I.L. 74-22, Medicare & Medicaid Guide (CCH) para. 27,044, at 10,425-26 (1974). A subsequent letter further defined the manner in which SCH determinations were to be made. I.L. 78-17 set out in pertinent part that:

 physical isolation of the hospital and its service area, as demonstrated by the absence of reasonably accessible facilities, or isolation of the hospital and its service area due to unusual local circumstances which results in general nonuse of the otherwise closest like facilities by residents in the hospital's service area is the key factor to a determination that a hospital is [a SCH] within the meaning of the regulation . . . . Examples of unusual local circumstances include, but are not limited to, adverse topographical conditions, extended periods of adverse weather conditions, and hospital admitting patterns in practice in the hospital's service area.

 I.L. 78-17, Medicare & Medicaid Guide (CCH) para. 28,972, at 9697 (April 1978).

 2.

 In 1983, Congress amended the method of paying hospitals under the Medicare program from a system based on retroactive reimbursement to a prospective payment system, under which a provider was to be paid a fixed amount for each Medicare patient as determined by classifications according to "diagnosis related groups." 42 U.S.C. § 1395ww(d)(1)(A). Congress retained, however, the favorable payment schedule for SCHs provided for in the prior method of calculation. Congress defined a SCH in the statute as:

 a hospital that by reason of factors such as isolated location, weather conditions, travel conditions, or absence of other hospitals (as determined by the Secretary), is the sole source of inpatient hospital services reasonably available to individuals in a geographical area . . .

 Id. § 1395ww(d)(5)(C)(iii).

 Pursuant to this specific delegation of rulemaking authority, the Secretary promulgated new SCH regulations which were initially published as interim final rules at 42 C.F.R. § 405.476(b) with a public comment period to follow. 48 Fed. Reg. 39752, et seq. (1983). After the notice and comment period, the interim final rules became final rules. 50 Fed. Reg. 234, et seq. (1984). In pertinent part, the regulation stated:

 (a) Criteria for classification as a sole community hospital. HCFA [Health Care Financing Administration] classifies a hospital as a sole community hospital if it is located in a rural area . . . and meets one of the following conditions:

 (1) The hospital is located more than 50 miles from other like hospitals.

 (2) The hospital is located between 25 and 50 miles from other like hospitals and meets one of the following criteria:

 (i) No more than 25 percent of the residents or, if data on general resident utilization are not available, no more than 25 percent of the Medicare beneficiaries in the hospital's service area are admitted to other like hospitals for care;

 (ii) The hospital has fewer than 50 beds and the intermediary certifies that the hospital would have met the criteria in paragraph (a)(2)(i) of this section were it not for the fact that some beneficiaries or residents were forced to seek care outside the service area due to the unavailability of necessary specialty services at the community hospital; or

 (iii) Because of local topography or periods of prolonged weather conditions, the other like hospitals are inaccessible for at least one month out of each year.

 (3) The hospital is located between 15 and 25 miles from other like hospitals but because of local topography or periods of prolonged severe weather conditions, the other like hospitals are ...


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