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March 11, 2004.

TOMMY G. THOMPSON, in his official capacity as Secretary of the United States Department of Health and Human Services, Defendant

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

This case comes before the court on the parties' motions for summary judgment. The plaintiff, St. Elizabeth's Medical Center of Boston, Inc. ("St. Elizabeth's"), is a charitable corporation that operates a non-profit hospital in Boston, Massachusetts. St. Elizabeth's seeks judicial review of a decision by the defendant, Tommy G. Thompson, Secretary of the Department of Health and Human Services ("the Secretary"), denying St. Elizabeth's a new provider exemption under 42 C.F.R. § 413.30(e). Because the Secretary has examined the relevant data and made a rational connection between the facts found and the choices made, the court grants the defendant's motion for summary judgment and denies the plaintiff's motion for Page 2 summary judgment.*fn1


  A. Factual Background

  1. Statutory and Regulatory Framework

  Title XVIII of the Social Security Act ("the Medicare statute") sets forth the federal health insurance program commonly known as Medicare. 42 U.S.C. § 1395 et seq. Medicare provides payment for covered services to aged and disabled persons. Pl.'s Mot. at 2; Def.'s Mot. at 2. Part A of the statute provides payment for certain inpatient hospital and post-hospital extended care services, including skilled nursing services. Def.'s Mot. at 2; see generally 42 U.S.C. § 1395-1395ggg. The Centers for Medicare and Medicaid Services ("CMS") administer Medicare under the authority of the Secretary.*fn2 Pl.'s Mot. at 2; Def.'s Mot. at 2. A facility or part of a facility that primarily furnishes either skilled nursing care and related services or rehabilitation services is known as a skilled nursing facility ("SNF"). Id.; 42 U.S.C. § 1395i-3 (a). Under Medicare, an SNF is entitled to reimbursement of reasonable costs that it incurs in treating a Medicare patient. 42 U.S.C. § 1395x(v)(1)(A); Pl.'s Mot. at 3; Def.'s Mot. at 3. CMS effectuates this reasonable cost restriction through its implementation of routine cost limits ("RCLs"), which are caps on the amount of reimbursement that Medicare provides for certain medical supplies and services. 42 C.F.R. § 413.30; Pl.'s Mot. at 3; Def.'s Mot. at 3-4. Page 3

  The regulations, however, allow for reimbursement above the RCLs in certain circumstances. Under 42 C.F.R. § 413.30:
Exemptions from the limits imposed under this section may be granted to a new SNF[.] A new SNF is a provider of inpatient services that has operated as a SNF (or the equivalent) for which it is certified under Medicare, under present and previous ownership, for less than 3 full years."
42 C.F.R. § 413.30(e).*fn3 This exemption from RCLs, commonly known as the "new provider exemption," was created in 1979 to mitigate the business risks, such as low patient occupancy, that a new inpatient facility might face that would reduce the amount of reimbursement. Pl.'s Mot. at 3; Def.'s Mot. at 6. In addition, even if a provider does not qualify as a new provider under the express terms of § 413.30(e), the Secretary may still grant an exemption from RCLs if the provider "relocates" and demonstrates that it serves a substantially different inpatient population at the new location. Def.'s Mot. ¶ 8; Provider Reimbursement Manual ("PRM") § 2604.1.*fn4 To demonstrate that a provider has relocated, the provider must show that in the new location (1) the provider serves a substantially different inpatient population, and (2) the total inpatient days at the new location were substantially less than at the old location for a comparable period [of at least three months]. Id.

  2. The St. Elizabeth's-Friel Transaction

  St. Elizabeth's is a general acute care hospital in Boston, Massachusetts. Administrative Record ("A.R.") at 67, 96. In the mid-1990's, St. Elizabeth's staff identified a clinical need for on-site skilled nursing and rehabilitative care. Id. at 1601-05. To address this need, St. Page 4 Elizabeth's decided to open a SNF, which it called the Transitional Care Unit ("TCU"). Id. at 443, 502. Under Massachusetts law, construction of a SNF may not begin until the Massachusetts Department of Public Health ("DPH") issues a "determination of need" ("DON"). Id. at 406-09. At the time St. Elizabeth's wished to construct its SNF, the only mechanism for obtaining a new DON was by acquiring the operating rights of an existing long-term care facility. Id. at 1193, 1465-68. This method for obtaining a DON was known as the "transfer of operating rights" method. Id. at 1465-68. Accordingly, St. Elizabeth's identified Friel Nursing Home ("Friel"), a family-owned nursing home located in Quincy, Massachusetts, as an existing long-term care facility from which St. Elizabeth's might acquire operating rights and thereby obtain a DON. Id. at 469-71, 1066.

  On February 28, 1996, St. Elizabeth's entered into an Asset Purchasing Agreement to purchase the operating rights to Friel's 29 beds. Id. at 422-35. The agreement defined the term "assets" to mean only bed operating rights, and did not cover the acquisition of any other of Friel's assets. Id. On July 24, 1996 the Massachusetts legislature enacted a new statute, Chapter 203 of the 1996 Acts and Resolves of Massachusetts ("Chapter 203"), which permitted hospitals to open new SNFs without acquiring the operating rights of pre-existing facilities. Id. at 418. On October 11, 1996, St. Elizabeth's formally requested a DON for its TCU. Id. at 730. On October 21, 1996, DPH issued a letter finding that St. Elizabeth's had satisfied the requirements of Chapter 203 and granted St. Elizabeth's a new DON to establish the TCU. Id. at 440, 2000-01.

  On January 15, 1997, the plaintiff applied to CMS for a new provider exemption to the RCLs. Id. at 1878-81. On June 18, 1997, CMS denied the plaintiff's application. Id. at 1885-88. In explaining its decision, CMS stated that the TCU "was established due to the purchase Page 5 and relocation of 29 long term care beds from [Friel]." Id. at 1887. CMS noted that Friel had received certification as a Medicaid nursing facility and that as a result, Friel was "considered an equivalent provider of skilled nursing or rehabilitative services." Id. CMS further found that Friel had operated as the equivalent of a SNF by virtue of having provided skilled nursing and rehabilitation services. Id. Finally, CMS determined that the relocation provision contained in PRM § 2604.1 did not entitle St. Elizabeth's to an exemption because the TCU's inpatient population was not substantially different from the population Friel served. Id.

  Dissatisfied with this result, on December 17, 1997, the plaintiff appealed CMS's decision to the Provider Reimbursement Review Board ("PRRB"). Id. at 63. The PRRB agreed with St. Elizabeth's interpretation of the new provider exemption, and on October 4, 2002, reversed CMS's decision. Id. at 65-112. In doing so, the PRRB found that St. Elizabeth's "acquisition of bed rights in the instant case does not represent a change of ownership." Id. at 99. Because the TCU was not established through the mere change in ownership of an already existing provider, St. Elizabeth's was entitled to a new provider exemption. Id. Further, the PRRB determined that "[t]he TCU serves a distinguishably different population than that served by Friel." Id. at 100.

  On December 4, 2002, the Secretary, acting through the CMS Administrator ("the Administrator"), reversed the PRRB, finding that St. Elizabeth's did not meet the criteria for the new provider exemption.*fn5 Id. at 1-14. In contrast to the PRRB's decision, the Secretary found that St. Elizabeth's established the TCU through a change in ownership because St. Elizabeth's Page 6 purchased the operational rights to Friel's beds. Id. at 10. The Secretary further concluded that because a change in ownership occurred, there was no new service provided, and therefore, St. Elizabeth's was not a new provider. Id. at 11. The Secretary then determined that Friel provided skilled nursing and/or rehabilitative services for more than three years. Id. at 12. Accordingly, the Administrator concluded that, including the TCU's previous ownership, St. Elizabeth's had operated an SNF for more than three full years. Id. Finally, the Secretary reasoned that St. Elizabeth's could not qualify for a new provider exemption as a relocated provider because it served a substantially similar inpatient population as Friel and that St. Elizabeth's did not demonstrate that the total inpatient days at the new location were substantially less than at the old location. Id. at 13-14.

  B. Procedural History

  On January 30, 2003, St. Elizabeth's filed a complaint with this court seeking judicial review of the Secretary's decision pursuant to 42 U.S.C. § 1395oo(f)(1). On June 16, 2003, St. Elizabeth's filed its motion for summary judgment. On August 18, 2003, the Secretary followed with his own motion for ...

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