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COUNTY OF LOS ANGELES v. SHALALA

January 20, 1998

COUNTY OF LOS ANGELES, Plaintiff,
v.
DONNA E. SHALALA, Secretary of Health and Human Services, Defendant. PASADENA HOSPITAL ASSOCIATES, LTD., Plaintiff, v. DONNA E. SHALALA, Secretary of Health and Human Services, Defendant. ROBERT PACKER HOSPITAL, et al., Plaintiffs, v. DONNA E. SHALALA, Secretary of Health and Human Services, Defendant. SUMMIT HOSPITAL CORPORATION, Plaintiff, v. DONNA E. SHALALA, Secretary of Health and Human Services, Defendant. UNIVERSAL HEALTH SERVICES, INC., et al., Plaintiffs, v. DONNA E. SHALALA, Secretary of Health and Human Services, Defendant. GALEN MEDICAL CORPORATION, et al., Plaintiffs, v. DONNA E. SHALALA, Secretary of Health and Human Services, Defendant. NU-MED BALDWIN PARK, INC., et al., Plaintiffs, v. DONNA E. SHALALA, Secretary of Health and Human Services, Defendant. CHARTER MEDICAL CORPORATION, Plaintiff, v. DONNA E. SHALALA, Secretary of Health and Human Services, Defendant. HOSPITAL CORPORATION OF NORTHWEST, INC., et al., Plaintiffs, v. DONNA E. SHALALA, Secretary of Health and Human Services, Defendant.



The opinion of the court was delivered by: HARRIS

 BACKGROUND

 The Medicare program, established in 1965, provides federally funded health insurance for the elderly and disabled. See 42 U.S.C. § 1395 et seq. (1988). Until 1983, hospitals were reimbursed based on their "reasonable costs" or "customary charges" for services provided. Id. at § 1395f(b). In 1983, in response to escalating Medicare expenditures, Congress revised the system for reimbursing hospitals. The new regime, known as the Prospective Payment System ("PPS"), pays hospitals a fixed, predetermined "prospective payment rate" for each hospital discharge. Id. at § 1395ww(d)(1). The prospective rates paid to hospitals for Medicare beneficiaries vary according to the category of illness treated, or "diagnosis related group" ("DRG"). Id. at § 1395ww(d). The rate for a DRG is intended to reflect the average resources required to treat cases within that DRG.

 When the new PPS system was proposed, public hospitals expressed concern that they would be at a disadvantage because they had sicker than average patients. See Hearings Before the Comm. on Ways and Means, H. Hrg. No. 98-3, at 218 (1983). In order to address this problem, Congress provided for additional payments for what are characterized as "outlier" cases, i.e., ones involving an unusually long length of stay ("day outliers") or extraordinarily high cost ("cost outliers"). 42 U.S.C. § 1395ww(d)(5)(A); see also Hearing Before the Subcomm. on Health of the Senate Comm. on Finance., S. Hrg. 98-60, pt. 1, at 50 (1983). Each year, the Secretary of the United States Department of Health and Human Services ("the Secretary") establishes thresholds for determining when a specific case qualifies as an outlier. 42 U.S.C. § 1395ww(d)(5)(A)(i)-(ii). The statute further provides that the outlier payment "shall approximate the marginal cost of care" beyond the thresholds, and that the "total amount of the additional payments made . . . for discharges in a fiscal year may not be less than 5 percent nor more than 6 percent of the total payments projected or estimated to be made based on DRG prospective payment rates for discharges in that year." Id. at § 1395ww(d)(5)(A)(iii)-(iv). In order to comply with the statute, each fiscal year ("FY") the Secretary sets the outlier thresholds at a level which she estimates will result in outlier payments being five to six percent of total Medicare payments projected to be made that fiscal year. *fn1"

 In FYs 1985 and 1986, actual outlier payments were less than five percent of total DRG prospective payments. *fn2" Plaintiffs, the owners of hospitals qualified as Medicare providers, argue that they are entitled to additional outlier payments for FYs 1985 and 1986 because the statute states that actual outlier payments for a fiscal year must represent five to six percent of estimated total Medicare payments for those years. In addition, plaintiffs claim that the manner in which the outlier thresholds were established for FYs 1984 to 1986 was arbitrary and capricious and therefore violated the Administrative Procedure Act. The Secretary, however, adheres to the view that the statute makes no provision for retroactive adjustments to outlier payments if they ultimately diverge from the Secretary's projection, and that her calculation of outlier thresholds was not arbitrary and capricious. See Medicare Program; Prospective Payment for Medicare Inpatient Hospital Services, 49 Fed. Reg. 234, 265 (Jan. 3, 1984). As a result, the Secretary refused to award plaintiffs any additional outlier payments. Plaintiffs filed timely appeals of that decision with the Provider Reimbursement Review Board ("PRRB"). The PRRB granted plaintiffs the right to seek expedited judicial review of their claims pursuant to 42 U.S.C. § 1395oo(f). The parties thereafter filed the instant pleadings.

 STANDARD OF REVIEW

 Summary judgment may be granted only if the pleadings and evidence "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). In considering a summary judgment motion, all evidence and the inferences to be drawn from it must be considered in the light most favorable to the nonmoving party. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986).

 DISCUSSION

 I. Proper Interpretation of Section 1395ww(d)(5)(A)(iv)

 The first issue in the cross-motions for summary judgment is the proper interpretation of 42 U.S.C. § 1395ww(d)(5)(A)(iv), which, as noted above, provides that "the total amount of the additional payments made . . . for discharges in a fiscal year may not be less than 5 percent nor more than 6 percent of the total payments projected or estimated to be made based on DRG prospective payment rates for discharges in that year." The Secretary argues that this language merely requires her to set outlier thresholds at a level projected to result in outlier payments in the five to six percent range. Plaintiffs claim that the statute requires that actual outlier payments made fall in the range. If the payments do not, plaintiffs contend that the Secretary is required to make retroactive payments to meet the statute's requirement.

 This Court's review of the Secretary's interpretation of § 1395ww(d)(5)(A)(iv) is governed by the two-step analysis set out in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 81 L. Ed. 2d 694, 104 S. Ct. 2778 (1984):

 
First . . . 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 . . . . the question for the court is whether the agency's answer is based on a permissible construction of the statute.

 Id. at 842-843. The precise question in this case is whether § 1395ww(d)(5)(A)(iv) requires the Secretary to make retroactive adjustments to outlier payments when the total outlier payments for a fiscal year turn out to be less than five percent (or more than six percent) of the total payments estimated to be made for that year.

 The starting point in statutory interpretation is the language of the statute itself. Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 475, 120 L. Ed. 2d 379, 112 S. Ct. 2589 (1992); Ardestani v. I.N.S., 502 U.S. 129, 135, 116 L. Ed. 2d 496, 112 S. Ct. 515 (1991). The plain language of a statute must be read together with its surrounding sections, since "the meaning of statutory language, plain or not, depends on context." Conroy v. Aniskoff, 507 U.S. 511, 515, 123 L. Ed. 2d 229, 113 S. Ct. 1562 (1993); see also Davis v. Michigan Dep't of Treas., 489 U.S. 803, 809, 103 L. Ed. 2d 891, 109 S. Ct. 1500 (1989) ("Words of a statute must be read in their context and with a view to their place in the overall statutory scheme.").


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