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CULLMAN REGIONAL MED. CTR. v. SHALALA

November 8, 1996

CULLMAN REGIONAL MEDICAL CENTER, Plaintiff,
v.
DONNA E. SHALALA, Secretary of the Department of Health and Human Services, Defendant.



The opinion of the court was delivered by: KESSLER

 I. Introduction

 This action for declaratory and injunctive relief is brought under the Administrative Procedure Act ("APA"), 5 U.S.C. § 701 et. seq. Plaintiff Cullman Regional Medical Center ("Cullman") is a hospital located in Cullman, Alabama that provides Medicare Services. Defendant Donna E. Shalala, Secretary of the Department of Health and Human Services (the "Secretary"), administers the Medicare program. Plaintiff seeks judicial review of the Secretary's denial of its application for geographic reclassification under the Medicare reimbursement regulations. In reviewing Cullman's request, the Secretary used data from the 1988 Health Care Financing Administration ("HCFA") wage survey, as required by the regulations governing reclassification. 42 C.F.R. § 412.230(e)(2). The data submitted by Cullman at the time the Secretary's decision was made did not meet the guidelines for reclassification. Cullman argues that the Secretary's decision must be overturned because the wage data correction policies relating to geographic reclassification are arbitrary, capricious, an abuse of discretion, and not otherwise in accordance with law, and therefore in violation of the Administrative Procedure Act, 5 U.S.C. § 701 et seq.

 These issues are now before the Court on the parties' cross motions for summary judgment. Upon consideration of the Motions, Oppositions, Replies, the Administrative Record, relevant case law, and the entire record herein, the Court concludes that Plaintiff's Motion for Summary Judgment must be denied and Defendant's Motion for Summary Judgment must be granted.

 II. Statutory Framework

 The Medicare program, established by the Medicare Act, provides health care for eligible aged and disabled persons. 42 U.S.C. § 1395 et seq. Under the Medicare system, hospitals are reimbursed for their services through public or private fiscal intermediaries. 42 U.S.C. § 1395h. Hospitals' claims for inpatient services are paid according to Medicare's Prospective Payment System ("PPS").

 Through PPS, hospitals are reimbursed a fixed amount for each patient discharged from one of various Diagnosis Related Groups ("DRGs"). 42 U.S.C. § 1395d. For each hospital, the rate of payment per DRG is based upon the hospital's "standardized amount" adjusted by its "wage index." 42 U.S.C. § 1395ww(d)(2)(H), (3)(E). The standardized amount is the portion of the hospital's costs that can be attributed to wages and wage related costs. 42 U.S.C. § 1395ww(d)(2)(C), (D). The wage index for a hospital is a comparison of the average hospital wage for the geographic area in which the hospital is located and the national average hospital wage. 42 U.S.C. § 1395ww(d)(3)(E). During the period at issue in this case, each provider hospital was designated as part of a rural, urban, or large urban area. That geographic classification was then used to compute the wage index, which was used to calculate the standardized amounts applicable to each area. 42 U.S.C. § 1395ww(d)(2)(D). Geographic classification, therefore, has a direct and significant effect upon the amount of Medicare reimbursement a hospital receives.

 To apply for reclassification, a hospital must submit a timely reclassification request to the MGCRB and must provide data comparing its average hourly wage to the average hourly wage of the area to which it seeks to be assigned. According to the Secretary's guidelines, such hospital wage data must be taken from the current version of the HCFA wage survey. 42 C.F.R. § 412.230(e)(2). Applications for reclassification for a given federal fiscal year must be submitted on or before the start of the first day of the preceding federal fiscal year. The MGCRB must review the application and issue its decision within 180 days of that deadline. 42 U.S.C. § 1395ww(d)(10)(C)(iii)(I). A hospital will qualify for reclassification if it can establish that its labor costs are sufficiently similar to those of urban hospitals in nearby Metropolitan Statistical Areas ("MSAs"). 42 U.S.C. § 1395ww(d)(8)(B). Within 15 days of the MGCRB's decision, the hospital may appeal to the Secretary through the HCFA Administrator. The HCFA Administrator must issue a decision within 90 days of the appeal. 42 U.S.C. § 1395ww(d)(10)(C)(iii)(II). The HCFA Administrator's decision is final and not subject to judicial review. Id.

 As noted above, the MGCRB uses wage data processed by HCFA in making its geographic reclassification decisions. When the PPS system was first implemented, the Secretary realized that there might be times when the official HCFA wage index data for a given hospital would be incorrect. Therefore, in September 1983, the Secretary promulgated an interim final rule on PPS implementation which set forth the procedure for correction of such data. In such a situation, the fiscal intermediaries, such as Blue Cross & Blue Shield, who had been working with wage data since 1979 and had been collecting wage data since 1984, see 49 Fed. Reg. 27,483 (July 3, 1984), would recalculate the payment rates. 48 Fed. Reg. 39,765 (Sept. 1, 1983). On January 3, 1984, the Secretary finalized this rule and stated that wage data corrections would be made prospectively only. 49 Fed. Reg. 34, 258 (Jan. 3, 1984). *fn1"

 Under the rules in effect at the time of Cullman's reclassification request, a hospital seeking to modify wage survey data was required to submit proposed corrections to its fiscal intermediary. The intermediary reviewed the proposed corrections and, if it agreed that the corrections should be made, forwarded the new data to HCFA's Office of Payment Policy ("OPP") with a recommendation that the wage survey at issue be amended. 57 Fed. Reg. 23618, 23631 (June 4, 1992). OPP then processed the proposed amendments and determined whether to incorporate them into its comprehensive wage survey.

 The MGCRB's geographic reclassification decisions can only be based on OPP approved wage information. 42 C.F.R. § 412.230(e)(2). The Secretary has recognized that when requests for wage index corrections, processed by OPP, and requests for geographic reclassification, processed by MGCRB, are submitted simultaneously, some decisions adverse to the hospitals have occurred because of the separateness of the two HHS entities. 56 Fed. Reg. 25,477 (June 4, 1992); 57 Fed. Reg. 23,630 (June 7, 1992) ("Because wage data corrections are processed throughout the year, the outcome of a hospital's reclassification request may in some cases depend entirely on whether the intermediary's audit and [OPP's] subsequent processing of its wage correction are complete before the MGCRB issues its decision."). However, the Secretary found that a policy allowing for midyear updates was better than that requiring the MGCRB to use the wage data in effect at the time the reclassification application was filed. Such a policy allows hospitals to benefit from wage data corrections processed while an application for reclassification is pending. Id.

 The Secretary also promulgated rules establishing the acceptable sources of data to be included in the wage survey. 55 Fed. Reg. 36,760 (Sept. 6, 1990) (interim final rule); 56 Fed. Reg. 25,477 (June 4, 1991) (final rule). At the time of the 1988 HCFA wage survey, at issue in this case, the Secretary excluded data for management services employees hired on a contract basis. However, due to concerns that this policy disadvantaged rural hospitals that are often forced to hire management labor on a contract basis, the Secretary later modified the policy to allow consideration of some management contract wage data. 59 Fed. Reg. 45330, 45355 (September 1, 1994).

 III. Procedural History

 On September 25, 1991, Plaintiff Cullman submitted an application for geographic reclassification to the MGCRB for federal fiscal year 1993. A.R. 52-109. *fn2" Cullman requested reclassification from rural Alabama to: (1) the Decatur, Alabama MSA for wage index purposes, (2) the Birmingham, Alabama MSA for wage index purposes, and/or (3) the Decatur, Alabama MSA for standardized amount purposes. A.R. 53.

 With its application for reclassification, Cullman submitted wage data that did not coincide with data in the then-current 1988 HCFA wage survey. In a letter to the MGCRB dated March 10, 1992, Cullman's representative, Coopers & Lybrand, explained the discrepancy by citing various wage data omissions in the 1988 HCFA wage survey. A.R. 39-45. Despite the fact that Cullman had submitted its reclassification application almost six months earlier, Cullman had still not sought official correction of its wage survey data from OPP through its fiscal intermediary, Blue Cross and Blue Shield of Alabama ("Blue Cross"). Plaintiff's Response to Defendant's First Set of Interrogatories at 4.

 On April 2, 1992, the MGCRB issued a decision granting Cullman reclassification to the Decatur, Alabama MSA for wage index purposes. Excluding the additional data submitted by Coopers & Lybrand, because it had not been approved by OPP, and relying solely upon the data contained in the 1988 HCFA wage survey, the MGCRB denied reclassification to the Birmingham, Alabama MSA for wage index purposes and to the Decatur, Alabama MSA for standardized amount purposes. A.R. 20-29.

 On April 14, 1992, Cullman appealed the MGCRB's decision denying the reclassification request to the Birmingham, Alabama MSA for wage index purposes. Cullman argued that particular items needed to be corrected in the 1988 HCFA wage survey and that if these corrections were incorporated into the survey, Cullman would be entitled to reclassification. In particular, Cullman pointed to wage data for its Administrator and its Director of Nursing. Cullman further stated that it was "working with" Blue Cross to make the necessary corrections, i.e., to obtain the necessary approvals from OPP. A.R. 13-19.

 In order to support its proposed data corrections, Cullman performed an audit of its wage data. On May 22, 1992, Cullman informed Blue Cross that the audit was complete and requested a meeting to discuss the proposed amendments. That meeting occurred on June 9, 1992, and in a letter to OPP dated June 11, 1992, Blue Cross forwarded Cullman's requested modifications, recommending that they be incorporated into the 1988 HCFA wage survey. A.R. 11-12. At several places in the documentation supporting the proposed amendments, Cullman indicated that one of the items that it sought to have included in its wage data was the cost of salaries for its administrator and director of nursing. However, Cullman failed to indicate that those administrators were not salaried employees but were hired under management contracts. A.R. 13, 16; Letter of June 11, 1992 from Hosea Hampton to John Davis, Exh. 2 to Defendant's Motion for Summary Judgment.

 On June 18, 1992, the HCFA Administrator affirmed the MGCRB's decision denying Cullman's reclassification to the Birmingham, Alabama MSA for wage index purposes. The HCFA Administrator did not consider Cullman's data corrections, as the 1988 wage survey had not yet been formally amended. A.R. 6-7.

 On July 22, 1992, OPP took final action formally approving Cullman's wage data corrections and incorporating them into the 1988 HCFA wage survey. That amendment took into account not only the salaries for the two management contract employees, but also approximately $ 19,000 in wage related costs over and above the amount requested by Cullman. Defendant's Response to Plaintiff's First Set of Interrogatories at 8.

 Some time after this July 22, 1992 amendment, OPP staff became aware that Cullman's salary costs for the administrator and director of nursing were not salary costs as defined by the applicable regulations, but contract labor costs. Id. Cullman had acknowledged that these were contract labor costs when it appealed to the MGCRB, which is a separate office from OPP. A.R. 13. Under the Secretary's then-current policies, such costs did not qualify as salary-related costs in the 1988 HCFA wage survey. Thus, OPP had erroneously, but favorably to Cullman, included those costs in the wage ...


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