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In re Medicare Reimbursement Litigation

March 26, 2004


This document relates to: Baystate Heath System v. Thompson, Civil Action No. 02-0601


Plaintiff hospitals in Baystate Heath System v. Thompson, Civil Action No. 02-0601 (PLF), bring suit for declaratory and injunctive relief in the nature of mandamus, asking the Court to compel defendant, the Secretary of Health and Human Services, through the Centers for Medicare and Medicaid Services ("CMS"), to reopen certain final payment decisions issued by the Secretary's payment agents that pertain to the Secretary's reimbursement of plaintiffs for services they rendered to indigent clients.*fn1 Defendant filed a motion to dismiss and plaintiffs moved for summary judgment. These two motions are currently before the Court for consideration. The Court heard oral argument on the motions on August 11, 2003.


The Medicare statute, Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., creates a federally funded health insurance program for the elderly and disabled, known as Medicare and Medicaid. This case arises under Part A of the Medicare program, which authorizes payments for, inter alia, certain inpatient hospital services and related post-hospital services. See 42 U.S.C. §§ 1395c, 1395d. A hospital may participate in the Medicare program as a provider by entering into a "provider agreement" with the Secretary of Health and Human Services. 42 U.S.C. § 1395cc. Plaintiffs here are not-for-profit acute care hospitals that participate as providers of inpatient hospital services in the federal Medicare program.

The operating costs of inpatient hospital services are reimbursed by Medicare primarily through the Prospective Payment System ("PPS"). See 42 U.S.C. § 1395ww(d). The regulations governing the PPS require a provider of inpatient hospital services to file an annual cost report with a "fiscal intermediary." 42 C.F.R. § 413.20(b).*fn2 The fiscal intermediary --typically an insurance company that acts as the Secretary's agent -- then audits the report and makes a final determination of the total amount of payments owed by Medicare to the provider for that fiscal year. The total amount to which a provider is entitled is set forth by the intermediary in an initial Notice of Program Reimbursement ("NPR"). See 42 C.F.R. § 405.1803. Under the statute, a provider that is dissatisfied with any aspect of the total payment amount set forth in the initial NPR may timely request a hearing before the Provider Reimbursement Review Board ("Board"), an administrative body composed of five members appointed by the Secretary. See 42 U.S.C. § 1395oo(a) and (h). If the provider objects to the Board's conclusion, it may seek judicial review, provided that the provider files suit within 60 days of the Board's determination. See 42 U.S.C. § 1395oo(f)(1).

The PPS contains a number of provisions that adjust reimbursements based on hospital-specific factors. See 42 U.S.C. § 1395ww(d)(5). This case involves one of the hospital-specific adjustments, specifically, the disproportionate share adjustment. The "disproportionate share," or "DSH," adjustment requires the Secretary to provide increased PPS reimbursements to hospitals that serve a "significantly disproportionate number of low-income patients." 42 U.S.C. § 1395ww(d)(5)(F)(i)(I). Whether a hospital qualifies for the DSH adjustment, and how large an adjustment it receives, depends on the hospital's "disproportionate patient percentage." See 42 U.S.C. § 1395ww(d)(5)(F)(v). The "disproportionate patient percentage" is the sum of two fractions, the "Medicare and Medicaid fractions," for a hospital's fiscal period. 42 U.S.C. § 1395ww(d)(5)(F)(vi).

The computation of the numerator of the "Medicaid" fraction is at the heart of this action. This numerator is calculated by determining the total number of a hospital's inpatient days attributable to patients who "were eligible for medical assistance under a State plan approved under subchapter XIX [ i.e., eligible for Medicaid], but who were not entitled to benefits under Part A of this subchapter [Medicare]." 42 U.S.C. 42 U.S.C. § 1395ww(d)(5)(F)(vi)(II). From 1986 through 1997, the Secretary construed the first portion of this numerator calculation to include only those patients who were both eligible for Medicaid payments under the relevant state Medicaid plan and who actually received such payments from the state. See 42 C.F.R. § 412.106(b)(4). Providers challenged this interpretation, and every circuit court that considered the Secretary's interpretation rejected it. The courts of appeals uniformly concluded that the numerator calculation must include all patient days for which a patient was eligible for Medicaid assistance regardless of whether a state Medicaid program actually paid the hospital for services provided to the patient. See Cabell Huntington Hospital, Inc. v. Shalala, 101 F.3d 984, 988 (4th Cir. 1996); Legacy Emanual Hospital and Health Center v. Shalala, 97 F.3d 1261, 1266 (9th Cir. 1996); Deaconess Health Services Corp. v. Shalala, 83 F.3d 1041, 1041 (8th Cir. 1996); Jewish Hospital, Inc. v. Sec'y of Health and Human Services, 19 F.3d 270, 276 (6th Cir. 1994).

In February 1997, the then-Secretary of HHS issued a ruling that rescinded the original interpretation of the statutory provision and prospectively mandated that in calculating the disproportionate patient percentage, the Medicaid numerator must include all inpatient days of patients who were eligible for Medicaid "whether or not the hospital received payment for those inpatient hospital services." Defendant's Motion to Dismiss, Attach., Heath Care Financing Administrative Ruling 97-2 at 2 (Feb. 27, 1997) ("Ruling" or "Ruling 97-2"). In issuing the Ruling, the Secretary did not concede that the prior interpretation was incorrect. Instead, she stated that "[a]lthough HCFA believes that its longstanding interpretation of the statutory language was a permissible reading of the statutory language, HCFA recognizes that, as a result of the adverse court rulings, this interpretation is contrary to the applicable law in four judicial circuits." Id. According to the Secretary, the changed interpretation would apply only prospectively, "[i]n order to ensure national uniformity in calculation of DSH adjustments." Id. The Ruling also expressly announced that the Secretary would not reopen past NPRs on the basis of this changed statutory interpretation. See id.

In response to the Ruling, two hospitals (the "Monmouth plaintiffs") sought to have their NPRs for the fiscal years ending in 1993 and 1994 reopened. See Monmouth Medical Center v. Thompson, 257 F.3d 807 (D.C. Cir. 2001). Under the regulations in effect at the time of the Ruling, there were two methods by which an intermediary had the authority to reopen a final determination. First,

[a] determination or decision... may be reopened with respect to findings on matters at issue in such determination or decision... either on motion of such intermediary officer or panel of hearing officers, Board, or Secretary, or on the motion of the provider affected by such determination or decision to revise any matter in issue at any such proceedings. Any such request to reopen must be made within 3 years of the date of the notice of the intermediary or Board hearing decision, or where there has been no such decision, any such request to reopen must be made within 3 years of the date of notice of the intermediary determination. No such determination or decision may be reopened after such 3-year period except as provided in paragraphs (d) and (e) of this section.

42 C.F.R. § 405.1885(a). Second, the regulations directed that a determination or decision "shall be reopened and revised by the intermediary if, within the aforementioned 3-year period, the HCFA notifies the intermediary that such determination or decision is inconsistent with the applicable law, regulations, or general instructions issued by the HCFA in accordance with the Secretary's agreement with the intermediary." 42 C.F.R. § 405.1885(b).*fn3 These review methods are in addition to the direct appeals process of NPRs provided for by the statute. See 42 U.S.C. §§ 1395oo(a)-(f).

Although Ruling 97-2 expressly stated that closed decisions would not be reopened, the Monmouth plaintiffs sought recalculation of their DSH payments under Section 405.1885(a) within three years of the issuance of their original NPRs, but to no avail. See Monmouth Medical Center v. Thompson, 257 F.3d at 810. These plaintiffs also attempted to proceed through the vertical appeal procedures provided for in 42 U.S.C. § 1395oo, but again were denied. The Monmouth plaintiffs then filed suit, alleging three different bases for district court jurisdiction. The district court concluded that it had no jurisdiction and therefore found for defendant; the plaintiffs appealed. The court of appeals determined that jurisdiction existed only under 28 U.S.C. § 1361, the mandamus statute. See id. at 814. The court concluded that the Ruling constituted notice to the intermediaries that the Secretary's interpretation was inconsistent with applicable law, and that Section 405.1885(b) of the regulations therefore "imposed a clear duty on intermediaries to reopen DSH payment determinations for the hospitals." Id. Because Ruling 97-2's prohibition against retroactive reopening conflicted with the regulation's imposition of a clear duty to reopen, the prohibition was a "nullity," and mandamus lay to assure that the plaintiff providers' NPRs were reopened and recalculated. Id. at 814-15.

The court of appeals also reviewed the steps the Monmouth plaintiffs had taken in seeking relief under Subsection 405.1885(a), noting that "we think it insignificant that, because of the Secretary's own three year limitation, reopening would not be available if sought today. Although mandamamus [ sic ] is classified as a legal remedy, its issuance is largely controlled by equitable principles. Since both hospitals were within the three-year mark when they made their requests for reopening, they are entitled to the reopening that was due them at that time." Monmouth Medical Center v. Thompson, 257 F.3d at 815 (internal quotation and citation omitted). The court rejected as irrelevant the Secretary's contention that the hospitals had failed to exhaust their remedies by failing to file proper appeals of their final decisions under Section 1395oo(a) within 180 days of the decisions, concluding that the plaintiffs were challenging the reopening prohibition of the Ruling, which plaintiffs could not have pursued until the Ruling was issued, which occurred more than 180 days after the original NPRs. See id. The court expressly noted that "the question is whether [plaintiffs] have done all they can to vindicate their rights to reopening. We have already shown above how all other avenues of relief [including appeal through Section 1395oo(a)] are either foreclosed or futile." Id.

In this action, plaintiffs filed suit for declaratory and injunctive relief in the nature of mandamus. Plaintiffs argue, inter alia, that the Monmouth decision requires this Court to direct the intermediaries to reopen and recalculate their NPR's for the three years prior to the Ruling, notwithstanding plaintiffs' failures (1) to request reopenings pursuant to Subsection 405.1885(a); and (2) to proceed through the administrative review channels provided for in the statute and regulations. Defendant filed a motion to dismiss under Rule 12(b)(1) and Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing that plaintiffs should be denied mandamus relief on timeliness and equitable grounds, thereby defeating plaintiffs' asserted basis of subject matter jurisdiction under the mandamus statute. *fn4 In response plaintiffs moved for summary judgment. Upon careful consideration of the pleadings and ...

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