The opinion of the court was delivered by: RICARDO URBINA, District Judge
MEMORANDUM OPINION GRANTING THE DEFENDANT'S MOTION FOR
SUMMARY JUDGMENT AND DENYING THE PLAINTIFF'S MOTION FOR SUMMARY
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
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.
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
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.
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
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
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.
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 ...