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Abbott-Northwestern Hospital v. Leavitt

July 12, 2005


The opinion of the court was delivered by: Ellen Segal Huvelle United States District Judge


Plaintiff Abbott-Northwestern Hospital ("the hospital"), a non-profit hospital in Minneapolis, Minnesota, brings this action for declaratory and injunctive relief against the Secretary of Health and Human Services ("the Secretary" or "HHS"). Plaintiff seeks a ruling compelling the Secretary to compensate the hospital for Medicare fees it claims it is due for fiscal years 1984 to 1988. The parties have cross-moved for summary judgment. As explained herein, the Court grants plaintiff's motion and remands this case to the Provider Reimbursement Review Board ("PRRB" or "the Board").


I. The Statutory and Regulatory Scheme

The Medicare compensation scheme at issue in this suit has been thoroughly explained in previous opinions. See, e.g., Washington Hosp. Ctr. v. Bowen, 795 F.2d 139, 141-42 (D.C. Cir. 1986); Georgetown Univ. Hosp. v. Bowen, 698 F. Supp. 290, 292-93 (D.D.C.), aff'd, 862 F.2d 323, 324-25 (D.C. Cir. 1988) ("Georgetown II").*fn1 Prior to 1983, hospitals providing services to Medicare beneficiaries were compensated on the basis of the "reasonable costs" incurred in treating a covered patient. 42 U.S.C. § 1395f(b). In April 1983, in order to promote greater efficiency, Congress enacted a "radically new" reimbursement scheme known as the prospective payment system ("PPS") that provided a standard reimbursement amount per patient based upon his or her diagnosis instead of paying hospitals for the actual services provided to each Medicare patient. See Georgetown II, 862 F.2d at 324. These standardized amounts are computed in advance. See 42 C.F.R. §§ 412.2, 412.60-412.88; see generally 42 U.S.C. § 1395ww(d) (establishing compensation scheme based on diagnosis-related group prospective payment rates, also known as the "federal rate").

In recognition of the severe financial challenges that this change would pose for hospitals if implemented immediately, Congress provided for a four-year "phase-in period," from October 1983 to October 1987 (also known as the "PPS transition years"), during which hospital compensation would be based on a hybrid of the old and new approaches. See Georgetown II, 862 F.2d at 324; 42 U.S.C. § 1395ww(d)(1)(C). During those years, an increasing percentage of payments to hospitals consisted of the new federal rate, and a decreasing percentage was based not on the hospitals' actual costs during the phase-in period, but rather on their reasonable costs incurred in the fiscal year before the Medicare changes took effect, which in plaintiff's case was 1982 (the "base year"). The latter is known as the "hospital-specific rate" or the "target amount."*fn2 See 42 U.S.C. § 1395ww(d)(A)(i)(I), (ii)(I); id. § 1395ww(b)(3)(A). Thus, a hospital's 1982 reasonable costs assumed particular significance for hospitals because that figure directly impacted Medicare payments not only for 1982, but also for the following four years.

The task of determining a hospital's "reasonable costs" for a given year under the earlier Medicare scheme has been delegated by the Secretary to the Health Care Financing Administration ("HCFA"), which since 2001 has been known as the Centers for Medicare & Medicaid Services ("CMS").*fn3 CMS in turn contracts with "fiscal intermediaries," such as Blue Cross and Blue Shield ("BC/BS"), to administer Medicare payments, including the audits of hospitals' reasonable costs. 42 U.S.C. § 1395h; Georgetown II, 862 F.2d at 324-25 & n.2. Upon completing such an audit, an intermediary issues a Notice of Program Reimbursement ("NPR"), which forms the preliminary basis for determining the base year target amount and constitutes the intermediary's "final determination." See 42 C.F.R. § 405.1803; Georgetown II, 862 F.2d at 324.

A hospital that is "dissatisfied" with the intermediary's NPR may appeal the finding to the PRRB within 180 days. See 42 U.S.C. § 1395oo(a)(1)(A)(i), (a)(3). Similarly, a hospital that is dissatisfied with "a final determination of the Secretary as to the [reimbursement] amount" may also appeal to the Board within 180 days of that decision. See id. § 1395oo(a)(1)(A)(ii), (a)(3). PRRB members are appointed by the Secretary, id. § 1395oo(h), and the Secretary retains the power to reverse or modify Board decisions. Id. § 1395oo(f)(1). Final PRRB decisions are subject to review in this Court. Id.

Although it is a final, administratively appealable determination, an intermediary's NPR (including any revisions made to it during the PRRB review process) is not necessarily the final word on what constitutes a hospital's target amount. In an earlier effort to rein in Medicare costs, Congress in 1972 authorized the Secretary to establish "routine cost limits" ("RCLs"), which apply to given categories of routine inpatient hospital operating costs. See 42 U.S.C. § 1395x(v)(1)(A), (v)(7)(B) (codifying Social Security Act Amendments of 1972, § 223, Pub. L. No. 92-603, 86 Stat. 1329, 1411 (1972)). In his implementing regulation, the Secretary provided a mechanism for making exceptions to RCLs in atypical circumstances. See 42 C.F.R. § 405.460(f)(1) (1982). Such RCL exception determinations are appealable to the Board. Id. § 405.460(c). If approved, an RCL exception typically has the effect of increasing a hospital's Medicare reimbursement amount for a given year in recognition of a hospital's atypical "actual cost[s]." Id. § 405.460(f)(1).

II. Precedents Interpreting the PPS Phase-in Scheme

Hospital reimbursement calculations during the phase-in period have been considered several times in this Circuit. In Washington Hospital Center, the Circuit Court deemed unlawful the Secretary's attempts to delay hospital appeals to the PRRB of intermediaries' final determinations of hospital-specific target amounts during the PPS transition years. 795 F.2d at 142. The Court held that a Secretarial ruling denying the PRRB jurisdiction over appeals prior to an intermediary's formal issuance of a NPR was contrary to the statute's plain language, as well as the legislative intent. Id. at 149 (discussing 42 U.S.C. § 1395oo(a)).

Two years later, in Georgetown II, the Circuit again invalidated a Secretarial regulation governing the PPS transition years because it conflicted with the "most direct [statutory] language" constituting Congress' "order[]." 862 F.2d at 326. The Secretary had ordered that during the phase-in period, any adjustments to a hospital's base year (i.e., 1982) reasonable cost amounts would be effective prospectively only, notwithstanding the fact that the now-incorrect target amount had already been used during earlier phase-in years to compute a hospital's reimbursement under the hybrid scheme. See 42 C.F.R. § 405.474(b)(3)(i)(C)(2) (1984). The only exception to this rule, which had the effect of denying hospitals substantial sums they would otherwise have been due under the PPS phase-in formulas, was if the earlier estimate was found to have been "unreasonable and clearly erroneous" at the time it was made by the intermediary. See id. § 405.474(b)(3)(ii). The Circuit held that the plain statutory language unambiguously required that PPS transition year reimbursements be based on "allowable operating costs," 42 U.S.C. § 1395ww(b)(3)(A) (italics added), which in turn meant that "if the reasonable cost system would have reimbursed a hospital for a given cost, it was 'allowable' and should become a factor in determining a hospital's base year figure [i.e., the target amount]." Georgetown II, 862 F.2d at 326. It followed from this statutory language that PPS transition year payments must be retroactively adjusted to reflect any intervening changes to the target amount. See id. at 327 ("A final administrative or judicial decision . . . that a particular cost was, indeed, 'allowable' in the base year should provide conclusive proof that the cost should be included in the provider's [target amount] for the PPS year under appeal.") (internal quotation marks and citation omitted). The Court rejected the Secretary's approach, since it "effectively cemented unlawful calculations into the transition year payments by largely insulating them from review." Id. at 328. The Court further noted that requiring retroactive adjustments to PPS transition year payments following final administrative or judicial rulings that adjust a hospital's target amount was "not at all inconsistent with Congress' purposes in phasing in PPS that the transition payments err on the side of cushioning the economic jolt involved in the implementation of the new system." Id. at 329 n.13.

In 2001, the Circuit yet again rejected an effort by the Secretary to deny PPS payments to hospitals. The Court held that, where the Secretary had changed a PPS regulation in light of its invalidation by numerous other circuits, and where intermediaries had a "clear duty . . . to reopen . . . payment determinations for the [affected] hospitals," hospitals that "have done all they can to vindicate their right of reopening" were entitled to mandamus relief in order to secure the retroactive payments they are due. Monmouth Med. Ctr. v. Thompson, 257 F.3d 807, 814-15 (D.C. Cir. 2001).

The Circuit went further in a recent decision, holding that the equities favored granting mandamus relief to compel retroactive reimbursements to hospitals, even where those hospitals had not timely petitioned for reopening of their NPRs and had waited five years to challenge the Secretary's ruling. In re Medicare Reimbursement Litig., No. 04-5203, 2005 U.S. App. LEXIS 13118, at *13 (D.C. Cir. July 1, 2005). The Circuit held that the Secretary's arguments in favor of preserving "important principles of finality and repose" could not prevail, particularly in light of his acknowledged legal obligations to the hospitals. "Having to pay a sum one owes can hardly amount to an equitable reason for not requiring payment." Id. at *15-16. Moreover, any additional administrative burden on the Secretary to process retroactive relief in adjusting NPRs would "'not outweigh the public's substantial interest in the Secretary's following the law.'" Id. at *15 (quoting In re Medicare Reimbursement Litig., 309 F. Supp. 2d 89, 99 (D.D.C. 2004)).

On the other hand, the Circuit has made clear that hospitals are not entitled to raise new issues on appeal from a reopening decision where they could have previously raised such arguments. Thus, "a provider's appeal of [a] reopening to the Provider Reimbursement Review Board is limited to the specific issues revisited on reopening and may not extend further to all determinations underlying the original reimbursement decision for that financial year." HCA Health Servs. of Okla., Inc. v. Shalala, 27 F.3d 614, 615 (D.C. Cir. 1994) ("HCA").

Against this backdrop, the Court will now turn to the facts of the instant case.

III. History of Proceedings

In the early 1980s, Abbott-Northwestern Hospital timely sought a RCL exception to account for its atypical nursing services in fiscal year 1982. See 42 C.F.R. § 405.460(c) (1982) (requiring a hospital seeking an RCL exception to lodge its request within 180 days of the intermediary's issuance of a given fiscal year's NPR). On December 2, 1991, the Secretary, acting through CMS, granted the hospital's request, increasing its 1982 base year costs by $638,721. (Def.'s Ex. A at A.R. 44.) On January 6, 1992, the fiscal intermediary, BC/BS of Minnesota, issued a revised NPR for 1982 reflecting the increase. (Id. at A.R. 46-47.)

On April 23, 1992, the hospital wrote the fiscal intermediary to inquire when the revised 1982 target figure would be incorporated into the PPS transition year payments for 1984-1988. The hospital asked whether it needed to file a formal request to reopen the transition year payments, and if a request to the intermediary would suffice, it asked that its letter serve as such a request. (Id. at A.R. 55.) On July 22, 1992, the intermediary responded that "I do not believe [42 C.F.R. §] 412.72 allows modifying the PPS base year costs under your circumstances. Therefore, we will not amend the transition period cost reports. Please contact me if you have questions. Of course, I am very willing to give consideration to any specific arguments you have regarding our position regarding PPS base year costs." (Id. at A.R. 57.)

An exchange of correspondence followed in which the hospital and its attorneys took up the intermediary's invitation to argue in favor of an adjustment for the phase-in period. In a December 3, 1992 letter to the intermediary, the hospital's attorney's asserted that a 1989 CMS ruling required the retroactive revision. On October 19, 1994, the intermediary rejected this specific argument, basing its conclusion on "contact" with the CMS central office, as well as its internal review of the ruling in question. "This [CMS] ruling relates to the Malpractice Rule and is not controlling in association with your approved exception for atypical nursing services. Therefore, the transition period cost reports will not be amended due to the base year cost exception. If you have any questions, please contact me . . . ." (Id. at A.R. 64.) On March 8, 1995, the hospital's attorney sent CMS a letter, citing Georgetown II and purportedly analogous circumstances in Newport Hospital and Clinic, Inc. v. Sullivan, No. 88-2490, 1990 U.S. Dist. LEXIS 13024 (D.D.C. Sept. 24, 1990), as authority for requiring a retroactive adjustment. (Def.'s Ex. A at A.R. 78.)

Hospital staff also continued to press the issue by letter and telephone and in meetings with the intermediary. (See, e.g., id. at A.R. 68.) On November 25, 1997, the intermediary responded to these overtures, as well as the hospital attorney's March 1995 letter to CMS, by stating that it had just been informed by the CMS regional office that the Secretary's "position is unchanged in that while the 1982 cost report was reopened to reflect the routine cost exception, the hospital specific rate is not revised to modify the provider's prospective payment base year or transition period cost reports. Therefore, based on this latest response from HCFA, our position must remain the same. If you have any new documentation that you would like us to review and would like to discuss this further, feel free to call me . . . ." (Id. at A.R. 67.)

On April 13, 1998, the hospital's attorney wrote directly to Charles Booth, then Acting Deputy Director of CMS, who had signed the 1991 letter approving the hospital's RCL exception, urging him to adjust the target rate for the phase-in years as a result of the 1982 RCL exception. The attorney stated that the Secretary's position "that the hospital specific rate was locked in by the initial PPS regulations . . . is inconsistent with the court decisions and HCFA's own rulings." He cross-referenced the legal arguments he had made in his 1995 letter to CMS. (Id. at A.R. 76.) A fax confirmation sheet dated February 1, 1999 indicates that 14 pages, including plaintiff's original 1992 letter to the intermediary requesting a transition period adjustment, was successfully sent to Mr. Booth at CMS headquarters. (Id. at A.R. 89.)

In a February 9, 2001 letter to CMS Director Booth, the hospital's reimbursement director stated that she understood that CMS, as well as the hospital's "attorneys, court decisions and HCFA's own rulings" dictated that the RCL exception be applied to adjust transition year payments. The necessary adjustment, in the hospital's view, was $1,636,565 for 1984 to 1988. She blamed the fiscal intermediary, which she understood to have only communicated with the CMS regional office, for the "break-down" in securing the reimbursement. In light of BC/BS' recent withdrawal as fiscal intermediary for Minnesota, the hospital was seeking CMS' direct assistance in securing the retroactive adjustment. (Id. at A.R. 91.)

Email correspondence between the hospital and the agency in 2002 and 2003 indicates that CMS continued to hope to "resolve this case and had expected to do so much earlier. Unfortunately, due to a plethora of issues taking priority, we've been unable to complete our analysis." (Id. at A.R. 96 (CMS email of Nov. 14, 2002).) As of January 10, 2003, CMS reported that "[i]f everything goes as planned, we should have an answer within the next two weeks." (Id. at A.R. 95.) In response to a two further inquiries by the hospital regarding the status of the ...

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