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September 9, 2002


The opinion of the court was delivered by: Walton, District Judge


In this matter, plaintiff, St. Luke's Hospital ("St. Luke's"), seeks judicial review of the denial by the defendant, the Secretary of Health and Human Services ("Secretary"), of its application for reimbursement of funds under the Medicare program as a result of plaintiff's request for an exception to its prospectively determined end-stage renal disease ("ESRD") composite rate for the 1993 fiscal year.*fn1 42 U.S.C. § 1395rr(b)(7) (2000). The Secretary denied plaintiff's request upon concluding that plaintiff did not demonstrate with "convincing objective evidence" that it qualified for a higher payment as an exception to the prospectively determined ESRD composite rate. Upon consideration of the parties' submissions and for the reasons set forth below, the Court must grant Defendant's Motion for Summary Judgment and deny Plaintiff's Motion for Summary Judgment.

I. Factual & Legislative Background

The plaintiff is a provider-based ESRD facility located in Bethlehem, Pennsylvania that offers ESRD outpatient dialysis treatment.*fn2 Compl. at 1-2. As a participator in the Medicare Program, the plaintiff is reimbursed for outpatient maintenance dialysis services*fn3 by means of a prospectively determined composite rate, which "is a comprehensive payment for all modes of in-facility dialysis and home dialysis . . . [and] is computed on a per treatment basis by adding labor and nonlabor portions, which are adjusted periodically."*fn4 Def.'s Mot. for Summ. J. ("Def.'s Mot.") at 4-5 (citing Medicare Provider Reimbursement Manual (PRM) § 2702). While Congress sought to regulate the reimbursement of ESRD dialysis services by means of a composite rate, it was careful to include a provision for exceptions of "unusual circumstances", and directed the Secretary to formulate both a method for determining the composite rate and to provide such exceptions as may be warranted. 42 U.S.C. § 1395rr(b)(7). Subsequently, the Secretary promulgated 42 C.F.R. § 413.170 (1993),*fn5 which provided that the Health Care Financing Administration ("HCFA")*fn6 may grant an exception to the composite rate if the dialysis provider

demonstrates with convincing objective evidence that its total per treatment costs are reasonable and allowable under [the relevant cost reimbursement principles of § 413.174], and that its per treatment costs in excess of its payment rate are directly attributable to [one or more specific exception criteria].

On April 28, 1994, the plaintiff submitted a request*fn7 to its fiscal intermediary,*fn8 Blue Cross and Blue Shield Association of Western Pennsylvania, seeking an exception from its established ESRD outpatient dialysis composite rate of $127.98, based on an atypical service intensity/patient mix.*fn9 Compl. at 6; Admin. R. ("A.R.") at 89-90. St. Luke's sought an exception in the amount of $174.41 per dialysis treatment. Def.'s Mot. at 11 (citing A.R. at 89-90). The fiscal intermediary reviewed the plaintiff's request and subsequently submitted it to HCFA with a recommendation that the exception be granted. Compl. at 6; A.R. at 96.

Upon reviewing the plaintiff's request, the HCFA denied the exception because "[w]hile the patient characteristics may indicate an atypical patient mix, [the request contained] inconsistent cost report data . . ."*fn10 A.R. at 1013. Specifically, the HCFA denied the request because plaintiff failed to explain "(1) a 19% increase in its cost per treatment (CPT) from FY 1992 to FY 1993, and (2) an inconsistency in St. Luke's documentation supporting its salary costs, which made it impossible to compare FY 1993 actual costs with FY 1994 projected costs."*fn11 Def.'s Mot. at 11 (citing A.R. at 1012-13). The HCFA explained that

The plaintiff timely appealed the HCFA's denial to the Provider Reimbursement Review Board ("PRRB"), which provides for an administrative review of exception denials by the HCFA pursuant to 42 C.F.R. § 413.194 (1993); PRM § 2726. Upon review of the HCFA's findings, the PRRB reversed the exception denial on the basis that the HCFA inappropriately relied upon PRM § 2725.3E and that while the FY 1993 numbers contained an obvious error, the HCFA's "review identified the error but did no further review of the obvious error." A.R. at 68. The PRRB found that the HCFA's "lack of appropriate review [was] in violation of [] Pub. 15-1 § 2724 which requires [the HCFA] to properly review all information submitted." Id.

The HCFA Administrator chose to review and subsequently reversed the decision of the PRRB, finding that the HCFA was unable to properly evaluate St. Luke's exception request because "the Provider failed to document the basis for the significant variance between the projected and prior costs as required by the regulations . . ." A.R. at 2-13. Specifically, the Administrator found that the HCFA "did not fail its obligation to review the Provider's application when it questioned the incorrect number of hours reported." Id. at 11. The Administrator reiterated that the plaintiff bears the burden of demonstrating that the exception is warranted, "[t]hat is, the Provider must show that its total costs per treatment are reasonable, and that its costs in excess of its payment rate are directly attributable to its atypical patient mix . . . [;] the Administrator finds that [the HCFA] does not have an obligation to perfect a Provider's ESRD exception request." Id. at 12. Moreover, the Administrator noted

that the Provider failed to relate its higher costs to its claimed atypical patient mix . . . [as] the Provider does not explain[] how the increase in the volume of the treatments results in a higher cost per treatment. While the Provider's salary cost may increase to service the higher volume, the higher salary costs does not mean that there are higher cost per treatment. . . The Provider must show that its increased costs are due to its atypical patient mix as opposed to other excess costs.

Id. at 11. Finally, the Administrator commented that the plaintiff submitted its request on the last day of the 180-day filing period for exception requests, making "it impossible for the Intermediary to request additional information which could be submitted timely." Id. at 12. The plaintiff subsequently filed this ...

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