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.
I. THE 1995 REGULATION WITHSTANDS THE PLAINTIFF'S SUBSTANTIVE CHALLENGE UNDER THE ADMINISTRATIVE PROCEDURE ACT.
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.
A. CONGRESS DID NOT EXPRESS A SPECIFIC INTENTION AS TO WHETHER RECLASSIFICATION MAY OCCUR IN THE ABSENCE OF A STANDARDIZED AMOUNT DIFFERENTIAL.
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 does not speak directly to the question at issue here, the Court must address the second question posed in Chevron, that is, whether the 1995 Regulation is based on a permissible construction of the Act. Chevron, 467 U.S. at 843.
B. THE 1995 REGULATION IS BASED ON A PERMISSIBLE CONSTRUCTION OF THE ACT.
In determining whether the 1995 Regulation is a permissible construction of the Act,
the court must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment. Although this inquiry into the facts is to be searching and careful, the ultimate standard of review is a narrow one. The court is not empowered to substitute its judgment for that of the agency.
Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 28 L. Ed. 2d 136, 91 S. Ct. 814 (1971) (citations omitted). "Normally, an agency rule would be arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in the view or the product of agency expertise." Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 77 L. Ed. 2d 443, 103 S. Ct. 2856 (1983). The agency must supply a reasoned basis for its action, supported by substantial evidence on the record considered as a whole; however, a court will "uphold a decision of less than ideal clarity if the agency's path may reasonably be discerned." Id.
The plaintiff argues that the 1995 regulation represents action by the Secretary that is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with the law because it contravenes the Secretary's prior policies and practices without sufficient justification, because it is premised on contradictory interpretations of the same statutory language, because it unlawfully discriminates between similarly situated hospitals, because it is impermissibly based on budgetary savings, and because it is inconsistent with the Act. The Court shall address each of these arguments in turn.
1. The Secretary Has Provided a Sufficient Justification For Changing Her Prior Policy and Practice.
That the 1995 Regulation represents a change in the Secretary's policy is undisputed. However, an agency may change its course to adapt its rules and policies to the demands of changing circumstances, as long as it supplies a reasoned analysis for doing so. State Farm, 463 U.S. at 42. Furthermore, an agency's interpretation of a statute is entitled to deference, even where it "represents a sharp break with prior interpretations." Rust v. Sullivan, 500 U.S. 173, 186, 114 L. Ed. 2d 233, 111 S. Ct. 1759 (1991).
In the rulemaking record, the Secretary set out her reasons for adding the requirement that the area requested for reclassification have a higher standardized amount than the area to which the hospital is currently classified:
The statute requires the Board to consider requests for standardized amount reclassification only if the "purpose" of the request is for the hospital to receive the other area's standardized amount. Since the standardized amount for rural areas now equals the standardized amount for other urban areas, there is no reason for a rural hospital to be reclassified to another urban area "for purposes of" the standardized amount itself.