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St. Elizabeth's Medical Center of Boston, Inc. v. Thompson

March 11, 2004


The opinion of the court was delivered by: Ricardo M. Urbina United States District Judge

Document Nos. 14, 16




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 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.

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. 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 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 ...

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