The opinion of the court was delivered by: Reggie B. Walton United States District Judge
The plaintiff, Milton Hospital Transitional Care Unit ("Milton"), a skilled nursing facility located on the campus of Milton Hospital in Milton, Massachusetts, brings this action pursuant to the Administrative Procedure Act ("APA"), 5 U.S.C. § 701 et seq., to overturn a decision by the Secretary of the Department of Health and Human Services ("Secretary"), denying Milton a "new provider exemption" under Medicare regulation 42 C.F.R. § 413.30(e) (1997). Complaint ("Compl.") ¶¶ 1, 5. Currently before the Court are the Plaintiff's Motion for Summary Judgment ("Pl.'s Mot."), the Defendant's Motion for Summary Judgment ("Def.'s Mot."), and the parties' oppositions thereto.*fn1 For the reasons that follow, this Court will grant the plaintiff's motion, and deny the defendant's motion.
To better understand the dispute in this case, it is helpful first to set forth the regulatory scheme which is at issue here.*fn2
(1) Federal Regulatory Scheme
Title XVIII of the Social Security Act established a system of health insurance for the aged and disabled, which is commonly referred to as the Medicare Program. See 42 U.S.C. § 1395 et seq. The Medicare Program is administered by the Secretary through the Centers for Medicare and Medicaid Services ("CMS"), formerly known as the Health Care Financing Administration ("HCFA"). St. Elizabeth's Med. Ctr. of Boston v. Thompson, 396 F.3d 1228, 1230 (D.C. Cir. 2005). Under the Medicare Program, a facility meeting the requirements of a skilled nursing facility ("SNF") can receive reimbursement for the "reasonable costs" it incurres for certain inpatient hospital and post-hospital extended care services provided to Medicare beneficiaries, subject to certain cost limits under 42 U.S.C. §§ 1395c, 1395d, 1395i, 1395x(b), (i), 1395yy(a) and 42 C.F.R. § 413.30 (1997).*fn3 "Seeking to encourage Medicare-certified provides to operate efficiently, Congress has instructed the Secretary . . . to cap payments under these programs at what he determines to be reasonable cost limits . . . and apply statutory norms in the determination." St. Elizabeth's, 396 F.3d at 1230 (internal citations omitted). A "reasonable cost," as applied to routine service and ancillary service costs at a freestanding SNF,*fn4 is 112% of the adjusted average amount of per diem routine service costs incurred by similar SNFs nationwide, adjusted to the prevailing wage rates of SNFs in the area. 42 U.S.C. § 1395yy(a). Any amount above a reasonable cost is deemed to be "unnecessary in the efficient delivery of needed health services" and is therefore disallowed. 42 U.S.C. § 1395x(v)(1)(A).*fn5 Thus, costs exceeding the reasonable costs cap are deemed unreasonable and are not reimburseable. Id. However, the Secretary can provide exemptions from that cap, 42 U.S.C. § 1395yy(c), and this has been done by establishing a "new provider exemption," which "allow[s] a provider to recoup the higher costs normally resulting from low occupancy rates and start-up costs during the time it takes to build its patient population," Paragon Health Network, Inc. v. Thompson, 251 F.3d 1141, 1149 (7th Cir. 2001) (internal quotation marks omitted). This exemption lasts until "the end of the provider's first cost reporting period beginning at least two years after the provider accepts its first patient." 42 C.F.R. § 413.30(e) (1997). Specifically, the new provider exemption in effect at the time Milton sought the exemption provided:
Exemptions from the limits imposed under this section may be granted to a new provider. A new provider is a provider of inpatient services that has operated as the type of provider (or the equivalent) for which it is certified under Medicare, under present and previous ownership, for less than three full years.
Id. Thus, to qualify for the new provider exemption, a facility must show that it is either (1) new, or (2) operating for the first time as a SNF or equivalent. It follows logically that facilities that (1) have operated before under "present or previous ownership," and (2) have operated as a SNF or equivalent, cannot qualify as "new providers."
St. Elizabeth's, 396 F.3d at 1231 (emphasis in original).*fn6 As the District of Columbia Circuit has recognized, "[t]here is no definitive court precedent as to what it means to operate as a SNF or its equivalent," and there is a split in the various United States Court of Appeals "over whether it is reasonable for CMS to attribute operation under previous ownership to a newly opened SNF solely because it acquired such rights" from another facility as required under state law. Id.
(2) Massachusetts' Regulatory Scheme
The Commonwealth of Massachusetts regulates health care facilities in its jurisdiction, in part, by issuing a Determination of Need ("DON"). A DON functions to ensure that "adequate health care services are made reasonably available to every person in the [Commonwealth] at the lowest reasonable aggregate costs," and does so by regulating the construction, relocation, and expansion of health care facilities. See Mass. Regs. Code tit. 105, § 100.532. Prior to beginning construction on a health care facility, the owner of that facility must first obtain a DON from the Massachusetts Department of Public Health, indicating that there has been a determination that there is a need for such a facility. Mass. Gen Laws. ch. 111, § 25C. Since 1992, Massachusetts has imposed a moratorium on DON applications for new nursing facility beds; thus, to obtain such a right, a facility must first acquire an existing nursing facility or transfer ownership of an unimplemented project, and then request that a DON be transferred to the new facility or location. Def.'s Mem. at 8-9. In addition, any nursing facility must be licensed as either a level I, II, III, or IV facility in order to operate in the Commonwealth. Pl.'s Mem. at 7-8.
Milton is a 20-bed hospital-based SNF located on the campus of Milton Hospital in Milton, Massachusetts. Administrative Record ("A.R.") at 2. In 1994, Neponset Hall, Inc. ("Neponset") owned and operated two licensed nursing homes-Neponset Hall Nursing Home and Ashmont Manor Nursing Home-with a total of 175 beds in Dorchester, Massachusetts. Id. at 675, 698. The Neponset nursing homes were Medicaid-certified as "nursing facilities." Id. at 3. On July 20, 1994, Neponset received a DON from the Massachusetts Department of Public Health "for new construction to replace and relocate" Neponset's two nursing homes into a single facility with 187 beds to be located in Milton, Massachusetts. Id. at 675. In order to open its own facility on the campus of Milton Hospital, Milton agreed on September 23, 1994, to purchase a 20-bed portion of Neponset's DON authorization for the new construction for $400,000 in order to transfer the beds to Milton's new facility. Id. at 698. In a letter to Neponset dated October 28, 1994, the Massachusetts Department of Public Health indicated that Milton's transfer request would be granted. Id. at 709-10. Subsequently, in December 1995, the Massachusetts Department of Public Health informed Neponset that because the "transfer will occur before the replacement facility is constructed, . . . [the transfer] must be associated with an actual decrease in the number of originally licensed beds, rather than a decrease in not yet licensed beds." Id. at 1232 (emphasis in original). The final plans for Neponset's replacement facility-Marian Bay Skilled Nursing and Rehabilitation Center ("Marina Bay")-were not approved until June 3, 1999. Id. at 114. However, on January 9, 1995, the Massachusetts Department of Public Health had notified Milton that its architectural plans had been approved, id. at 1235-36, and that Milton's licensure would be contingent upon the "prior or simultaneous delicensure of beds" at Ashmont Manor and/or Neponset Hall, or the "prior or simultaneous delicensure of 20 beds at the facility resulting from the completed consolidation" of Ashmont Manor and Neponset Hall. Id. at 1237. On May 1, 1995, Milton's received a license to operate a 20-bed nursing facility. Id. at 2795. On that same date, the Massachusetts Department of Health "permanently eliminated 20 level III beds" at the Neponset Hall facility. Id. at 3209. Milton also admitted its first patient on that same day. Id. at 2, 74, 2799.
On May 12, 1996, Milton was certified to receive Medicare payments, id. at 2, 74, 2797-98, and on June 2, 1995, submitted a request for an exemption from the SNF routine service cost limits as a new provider, id. at 2797-2801. On November 20, 1995, the CMS denied Milton's request for a new provider exemption. Id. at 623-27. Milton appealed this decision to the Provider Reimbursement Review Board ("PRRB"), id. at 631-32, which reversed CMS's denial of Milton's request, id. at 73-128. However, on December 3, 2002, the Administrator of the CMS ("Administrator"), on behalf of the Secretary, reversed the PRRB's decision, concluding that the "CMS correctly determined that the Provider in this case did not meet the criteria . . . for the new provider exemption." Id. at 12.
The gravamen of the Administrator's decision was that the "transfer of operation rights [from Neponset to Milton of the 20-beds] constitutes a change of ownership transaction for purposes of determining whether the Provider qualified for an exemption as a new provider." Id. at 11. Thus, the Administrator determined that because Milton acquired the rights to the beds from Neponset, it had effectively operated previously under different ownership. Moreover, the Administrator concluded that the record shows that the prior owner of the beds [Neponset], as a [nursing facility], was a Medicaid certified Nursing Facility, and had provided skilled nursing and related services for more than three ...