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May 3, 1996


The opinion of the court was delivered by: RICHEY


 Before the Court in the above-captioned case are the parties' cross-motions for summary judgment. The plaintiff, a hospital that participates in the Medicare program, challenges the validity of a final rule by the Secretary of the Department of Health and Human Services, 42 C.F.R. § 412.230 (a) (5) (ii) (the "1995 Regulation"). *fn1" The 1995 Regulation, effective October 1, 1996, precludes a hospital from obtaining Medicare geographic reclassification for purposes of using another area's "standardized amount" if the area to which the hospital seeks reclassification does not have a higher standardized amount than the one the hospital currently receives. Upon careful consideration of the pleadings, the entire record herein, and the law applicable thereto, and for the reasons expressed below, the Court shall deny the plaintiff's motion for summary judgment and shall grant the defendant's motion for summary judgment.


 The Medicare program, established under title XVI II of the Social Security Act ("Act"), 42 U.S.C. § 1395 et seq., pays for covered medical services furnished primarily to eligible aged and disabled persons. Part A of the program authorizes payment for covered care in institutions, including hospitals that have entered into a provider agreement with the Secretary. 42 U.S.C. § 1395x(u), 1395cc. Most hospitals that have entered into such agreements, including the plaintiff, are reimbursed under the "Prospective Payment System" ("PPS"). Id. Under the PPS, the amount of reimbursement to a provider hospital for a given service is dependent upon the hospital's average "standardized amount" per discharge, see 42 U.S.C. § 1395ww(d) (2) (C) - (D), and the area wage index applicable to the hospital, see 42 U.S.C. § 1395ww(d) (3) (E).

 All hospitals participating in the Medicare program are classified as located in "rural areas," "large urban areas," and "other urban areas." The standardized amount and the wage index are determined with reference to these classifications. For federal fiscal years prior to FY1995, the Act required the Secretary to compute a separate average of hospital standardized amounts for the three different classifications. 42 U.S.C. § 1395ww(d) (2) (D).

 Congress has established a process for hospitals to apply for "reclassification" to another geographic area for certain Medicare payment purposes. 42 U.S.C. § 1395(d) (10). To implement this process, Congress established the Medicare Geographic Classification Review Board ("MGCRB" or "Board") to consider applications for reclassification. 42 U.S.C. § 1395ww(d) (10) (A) - (C). The MGCRB reviews reclassification applications pursuant to statutory standards, as well as guidelines prescribed by the Secretary. 42 U.S.C. § 1395ww(d) (10) (C) - (E).

 Pursuant to 42 U.S.C. § 1395ww(d) (10) (D) (i), the Secretary has issued regulations establishing guidelines to be used by the MGCRB in reviewing applications for reclassification. 42 C.F.R. §§ 412.230-412.280. Under the guidelines, a hospital may be reclassified to another area for the purpose of using the other area's wage index, standardized amount, or both, if the requesting hospital meets certain criteria. 42 C.F.R. §§ 412.230-412.234.

 The PPS also applies additional reimbursement factors for certain hospital-specific characteristics, such as the Disproportionate Share Hospital ("DSH") adjustment relevant to the present case. The DSH adjustment reflects the higher costs that hospitals incur for treating a large proportion of low-income patients, as well as the higher indirect costs of operating in areas accessible to the poor. 42 U.S.C. § 1395ww(d) (5) (F). The Act does not specify the effect, if any, of reclassification on these reimbursement factors; however, the Secretary has tied these reimbursement factors to the standardized amount classification. 55 Fed. Reg. 36,761 (Sept. 6, 1990); 56 Fed. Reg. 25,471 (June 4, 1991). In general, urban hospitals receive more favorable DSH payments than do rural hospitals.

 After the MGCRB guidelines were promulgated, Congress amended the Act in November 1990 to mandate the gradual merger of the "rural" and "other urban" standardized amounts so that, beginning in FY1996, the Secretary must calculate a single "other area" standardized amount applicable to both rural and other urban hospitals, while large urban areas continue to receive a separate, higher standardized amount. 42 U.S.C. § 1395ww(d) (3) (A) (iv). When Congress phased out the distinct standardized amounts for "rural" and "other urban areas," the Secretary proposed a change to the regulations that a hospital would not be eligible for reclassification for the purpose of the standardized amount if the area to which it sought reclassification did not have a higher standardized amount than the area in which the hospital was located. 60 Fed. Reg. 29,202, 29,216 (June 2, 1995) (proposed rule). Prior to this proposed change, the Secretary had accepted, processed, and approved MGCRB applications by hospitals to seek geographic reclassification to an urban area, even if such reclassification would not result in the hospital receiving a higher standardized amount. In proposing the change, the Secretary reasoned that, while the statutory language permitted her to tie reimbursement factors such as DSH to the standardized amount, it did not require her to perform reclassifications for a purpose other than changing a hospital's standardized amount or wage index. After notice and comment, the Secretary adopted the proposed rule as final on September 1, 1995. 60 Fed. Reg. 45,799-802, 45,848-49 (Sept. 1, 1995) (final rule); 42 U.S.C. § 412.230 (a) (5) (ii).

 The plaintiff is a 294-bed, non-profit, acute care hospital located in Opelika, Alabama, a rural area roughly 30 miles from Columbus, Georgia. It is a provider of services as defined in the Medicare Act and has entered into an agreement with the Secretary to provide services to Medicare beneficiaries pursuant to 42 U.S.C. § 1395cc. The plaintiff has been denied reclassification to the Columbus, Georgia urban area on the ground that the challenged regulation prevents that reclassification. As a result, the plaintiff will not be eligible for an increased DSH payment. On October 12, 1995, the plaintiff filed a Complaint with the Court, seeking declaratory and injunctive relief against enforcement of the Secretary's regulation, 42 C.F.R. § 412.230(a) (5) (ii), on the grounds that it violates the Administrative Procedure Act and the Medicare Act.


 Summary judgment is appropriate when there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56(c); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986). Here, there are no genuine issues of material fact in dispute and the case properly is postured for determination as a matter of law.

 Under the APA, the Court must hold unlawful and set aside agency action, findings, and conclusions found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, or without observance of procedure required by law. 5 U.S.C. § 706. The plaintiff here has lodged a substantive challenge to the 1995 Regulation, as well as a procedural one.


 Consistent with the scope of review prescribed in the APA, when a court reviews an agency's construction of the statute that it administers, it is confronted with two questions:

First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute, as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.

 Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984) (footnotes omitted). Based on these well-settled principles, the Court shall conclude that Congress did not express a specific intention as to whether reclassification may occur in the absence of a standardized amount differential between the current classification and the requested classification. The Court further shall conclude that the 1995 Regulation constitutes a reasonable policymaking exercise on the part of the agency.


 The Act provides in relevant part that the MGCRB "shall consider the application of any subsection (d) hospital requesting that the Secretary change the hospital's geographic classification for purposes of determining for a fiscal year-- (I) the hospital's average standardized amount . . . or (II) the factor used to adjust the DRG prospective payment rate for area difference in hospital wage levels . . . ." 42 U.S.C. § 1395ww(d) (10) (C) (i). The Act does not directly speak to the precise question at issue here, i.e., the appropriate course of action with respect to a reclassification application in the absence of a standardized amount differential between the current classification and the requested classification. Congress, however, did delegate to the Secretary the task of publishing guidelines for the MGCRB in rendering reclassification decisions. 2 U.S.C. § 1395ww(d) (10) (D). Because the Act ...

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