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Indian Path Medical Center v. Leavitt

June 9, 2006


The opinion of the court was delivered by: Henry H. Kennedy, Jr. United States District Judge


In 2003, Congress passed legislation directing the establishment of a one-time appeal process that allowed hospitals to challenge their "wage index" geographic classification and request reclassification to a different geographic area for a limited time. Plaintiffs, five not-for-profit hospitals located in Tennessee, bring suit against Michael O. Leavitt in his official capacity as Secretary of the Department of Health and Human Services ("the Secretary"), challenging a certain criterion issued by the Secretary in 2004 with regards to this one-time appeal process. Plaintiffs assert that this criterion is "arbitrary, capricious, and unreasonable, and is an unlawful and unconstitutional defect in the one-time process," Am. Compl. ¶ 1, and seek an order requiring the Secretary to revise the criterion and to reconsider plaintiffs' applications under that revised criterion.

Before the court is the Secretary's motion to dismiss for lack of subject matter jurisdiction [#15]. Upon consideration of the motion, the opposition thereto, and the record of this case, the court concludes that the motion must be granted due to plaintiffs' lack of standing.


The Medicare program, established under Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., provides a system of health care to eligible elderly and disabled individuals. Under this program, hospitals are reimbursed for providing certain inpatient hospital services. In 1983, Medicare began paying hospitals using a Prospective Payment System ("PPS"), under which payments are based on previously determined rates that vary according to the patient's diagnosis. Id. § 1395ww(d).*fn1 To account for wage variances due to geographic location, the Medicare program also adjusts payment rates using a "wage index." The wage index is a comparison of the average hospital wage for the geographic location in which the hospital is located and the national average hospital wage. Id. § 1395ww(d)(2)(H), (3)(E).

All hospitals participating in the Medicare program are classified as being located in a "large urban area," an "other urban area," or a "rural area." Id. § 1395ww(d)(2)(D). That classification is in turn used to compute the wage index, which in turn determines the payment rates for that area. As such, geographic classification has a direct and significant impact on the amount of reimbursement a hospital receives for a given service.

To address the concerns of hospitals that argued that they had been improperly classified to a geographic area that did not reflect the higher wage costs they incurred, Congress amended the Medicare Act, effective October 1, 1988, to allow the Secretary to reclassify the geographic region of certain hospitals for purposes of determining, inter alia, the area wage indices. Omnibus Budget Reconciliation Act of 1987, Pub. L. No. 100-203, § 4005(a), 101 Stat. 1330, 1330-47 and -48 (1987), as amended by Medicare Catastrophic Coverage Act of 1988, Pub L. No. 100-360, § 411(b)(4), 102 Stat. 683, 770 (1988) (codified at 42 U.S.C. § 1395ww(d)(8)(B)). Congress intended these changes to apply to the "limited number of hospitals" that merit "payment at the other urban rate or the large urban rate because of their location in counties adjacent to at least one [urban area] and their commuting patterns." 55 Fed. Reg. 36,754, 36,755 (Sept. 6, 1990).

After these amendments were enacted, many hospitals applied for reclassification but were denied relief because they did not meet the requirements set forth in the statute. To address the concerns of the hospitals that had been denied reclassification, Congress soon thereafter established the Medicare Geographic Classification Review Board ("MGCRB"), whose function is to review applications for reclassification according to statutory standards and guidelines prescribed by the Secretary. 42 U.S.C. § 1395ww(d)(10). Under the statute, if an individual hospital is dissatisfied with the MGCRB's decision, it can appeal to the Secretary, who considers the appeal and renders a decision within 90 days as to whether it is correct and whether further administrative action is necessary. The Secretary's decision is final and not amenable to further review by the judiciary. Id. § 1395ww(d)(10)(C)(iii)(II).

The Secretary has since promulgated regulations setting forth criteria and conditions for use by the MGCRB when rendering reclassification decisions. See 42 C.F.R. § 412.230 et seq. The regulation implicated in this case sets forth the criteria that all PPS hospitals in urban counties must meet in order to be reclassified into a different urban area. 42 C.F.R. § 412.234. Among other things, § 412.234 requires that all such hospitals apply for redesignation as a group; that the county in which these hospitals are located be adjacent to the urban area to which they seek reclassification; and that their average incurred costs be more comparable to the amount paid under the reclassified rate than under their current classification.

In December 2003, Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub. L. No. 108-173, 117 Stat. 2066 (2003). Section 508 of this Act required the Secretary to establish, by January 1, 2004, a "one-time appeals process" under which certain hospitals that otherwise would be ineligible for reclassification could file an appeal of their wage index classification and request reclassification into another area. If successful, the hospital would be reclassified for a three-year period beginning April 1, 2004. 42 U.S.C. 13955ww note. Congress indicated that there was to be no administrative or judicial review of the outcome of this appeal and limited the expenditures that could result from reclassification under the appeal process to $900 million. Id.

Under this one-time appeal process, a hospital qualified for reclassification if it satisfied a number of statutory requirements and met "such other criteria, such as quality, as the Secretary may specify by instruction or otherwise." Id. Pursuant to the Act, the Secretary set forth eight categories of hospitals that would be eligible for reclassification. See Medicare Program; Notice of One-Time Appeal Process for Hospital Wage Index Classification, 69 Fed. Reg. 661, 662--63 (Jan. 6, 2004) ("January Notice"). One of these categories-the so-called Category D-allows hospitals that have been "part of an [unsuccessful] urban county group reclassification application to the MGCRB for FY 2004 or FY 2005 in accordance with [42 C.F.R.] § 412.234," id. at 663, to qualify for reclassification.

Plaintiffs concede they do not meet the requirements of Category D because they were not part of a previously filed urban county group application that had been denied by the MGCRB. Nonetheless, plaintiffs timely applied for reclassification under Category D, stating that they had not filed a previous group application because they knew that they failed to meet the requirements and that applying, therefore, would have been futile. Plaintiffs argued that the "filing, or non-filing, of an actual application should not preclude a hospital . . . from availing itself of this opportunity [for reclassification] especially when the circumstances for said facility mirror those of the hospitals who may have in fact filed such applications." Am. Compl., Ex. A.

By correspondence dated April 16, 2004, the MGCRB denied each of plaintiffs' applications on the grounds that the hospitals failed to meet the requirements of Category D. After reviewing all of the applications, MGCRB ultimately reclassified a total of 121 hospitals under the one-time appeal process, obligating the entire $900 million allocated by Congress. Def.'s Mot., Ex. 1, ¶ 3. In fact, MGCRB determined that 154 additional hospitals met the criteria for reclassification but were nonetheless denied reclassification due to lack of funds. Id., ¶ 4.

Plaintiffs have since filed a two-count complaint arguing that the requirements of Category D violate both constitutional guarantees of due process and the Administrative Procedures Act, 5 U.S.C. § 551 et seq.*fn2 Plaintiffs seek a declaratory judgment that the Secretary's promulgation of Category D was arbitrary, capricious, and an abuse of discretion ...

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