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Alpena Dialysis Services v. Leavitt

September 18, 2006


The opinion of the court was delivered by: Gladys Kessler U.S. District Judge


In this consolidated action, three providers of End Stage Renal Disease ("ESRD") treatment bring suit against Defendant Michael O. Leavitt, Secretary of the U.S. Department of Health and Human Services ("HHS"),*fn1 pursuant to Title XVII of the Social Security Act, 42 U.S.C. §§ 1395 et seq. ("the Medicare Act"). Plaintiffs-Alpena Dialysis Services ("Alpena"), Chippewa Dialysis Services ("Chippewa"), and Northern Michigan Hospital ("NMH")-seek review of final agency action denying their request for exceptions to the prospective payment rate system used in the federal Medicare program.

This matter is before the Court on Plaintiffs' Motion for Summary Judgment [#13] and Defendant's Cross Motion for Summary Judgment [#15]. Upon consideration of the Motions, Oppositions, and Replies, and the entire record herein, and for the reasons stated below, Plaintiffs' Motion for Summary Judgment is denied and Defendant's Motion for Summary Judgment is granted in part and denied in part.


A. Statutory and Regulatory Framework

Congress created the Medicare program in 1965 to pay for certain specified, or "covered," medical services provided to eligible elderly and disabled persons. See 42 U.S.C. §§ 1395 et seq.. Under the program, health care providers are reimbursed for a portion of the costs that they incur treating Medicare beneficiaries pursuant to an extremely "complex statutory and regulatory regime." Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404 (1993). That regime is administered by the Centers for Medicare & Medicaid Services ("CMS" or "the agency")*fn2 under the supervision of the Secretary of HHS ("the Secretary") and through a network of fiscal intermediaries, private entities with which the Secretary contracts to review and process Medicare claims in the first instance.

Medicare covers inpatient and outpatient dialysis treatments for ESRD patients. See 42 C.F.R. § 413.180.*fn3 CMS reimburses outpatient ESRD treatments through a prospectively-determined "composite rate system" that sets a facility's per-treatment reimbursement rate on the basis of its labor costs, patient population, service intensity, and other relevant factors. See 42 U.S.C. § 1395rr. During certain periods of time, called "exception windows," the Secretary will entertain a facility's request for an increase in its composite rate, called an "exception." See 42 C.F.R. § 413.180.

To qualify for an exception, the petitioning facility must satisfy a two-prong test "by convincing objective evidence." First, it must demonstrate that its total per-treatment costs are reasonable and allowable. Second, it must establish that one of five enumerated factors causes its actual treatment costs to exceed its composite payment rate. Id. § 413.182. A petitioning facility must satisfy CMS that an exception is appropriate under the applicable regulations and carries the burden of proof at all times. Id. § 413.180.

A facility seeking an exception initiates the process through its fiscal intermediary, which then forwards the request to CMS with a recommendation that it be approved or denied. Id. § 413.94. Taking the intermediary's recommendation into account, CMS must decide whether to grant the exception. All CMS decisions are subject to review by the Provider Reimbursement Review Board ("PRRB" or "the Board"), an administrative appellate body within HHS. Id.; see also 42 U.S.C. § 1395oo(a). The CMS Administrator ("the Administrator"), acting as the Secretary's proxy, may affirm or reverse any decision made by the PRRB. If the Administrator takes no action for 60 days, the PRRB decision becomes final agency action. 42 U.S.C. § 1395oo(f)(1). A party may seek judicial review of the Administrator's action or, if the Administrator does not act within 60 days, of the PRRB's decision. Id.

B. The Instant Requests for Composite Rate Exceptions*fn4

Plaintiffs are Medicare-approved dialysis providers located in northern Michigan. Alpena, Chippewa, and NMH each sought exceptions to their composite rate during an exception window that opened on March 1, 2000. Each Plaintiff claimed it had an atypical patient population or atypical service intensity, both of which are among the permissible grounds for seeking an exception. See 42 C.F.R. § 413.184. All three Plaintiffs are represented by the same counsel and are jointly litigating this consolidated case.

1. Plaintiff Alpena

Alpena is a free-standing facility that provides outpatient dialysis services to residents of Alpena, Michigan and surrounding areas. At all relevant times, the composite rate for Alpena was $123.96 per treatment. Claiming atypical service intensity resulting in unusually high labor costs, it requested an exception of $26.65 per treatment in March 2000. See Alpena Admin. R. at 1623. If approved, the exception would have raised its reimbursement rate to $150.61 per treatment. United Government Services, L.L.C. - WI, Alpena's fiscal intermediary, forwarded the request to CMS with a recommendation that it be approved. Id. at 16.

On October 12, 2000, CMS denied the exception. The agency found that Alpena had miscalculated its average labor costs in two ways: by failing to include data about treatments provided to its home dialysis patients; and by including salaries only, instead of salaries and employee benefits, in its calculation. Id. As a result, while Alpena had argued that its labor costs in fiscal year 1999 were $52.16 per treatment compared to a composite rate allowance of $40.00, CMS concluded that its actual labor costs were $44.75 per treatment compared to an allowance of $47.00. Id. at 1623-24. CMS denied the exception on the ground that Alpena's actual labor costs were less than what was allowed under its composite rate and were projected to remain so. See Alpena Admin. R. at 1624.

CMS also rejected Alpena's argument that its patient population required nursing hours that were atypically high. See id. The agency found that its average nursing hours per treatment were 4.19 in fiscal year 1998 and 2.70 in fiscal year 1999 and were projected to be 2.78 in fiscal year 2000. Id. According to CMS, "national audited data for 1988 and 1991, the latest available," showed an average per-treatment duration of 3.0 hours. Id. As a result, CMS concluded that "even if [Alpena's] patient mix [were] to be found atypical, its nursing hours per treatment were not atypical." Id.

CMS did not decide whether Alpena in fact treated an atypical patient population. The agency argued that because it had found that the facility's per-treatment labor costs did not deviate substantially from national norms, it was not necessary to decide whether its patient population was atypical. Id. at 22.

Alpena appealed to the PRRB on January 8, 2000. It argued, first, that the agency improperly declined to decide whether it served an atypical population. Second, Alpena alleged that CMS failed to give adequate weight to the high percentage of aged and diabetic patients it treats. Third, and finally, Alpena criticized the figure of 3.0 nursing hours per treatment ("the 3.0 hours figure") as improper and deficient and argued that the agency's use of it was reversible error. Id. at 23-25.

By order dated December 22, 2003, the PRRB affirmed CMS's denial of Alpena's exception request.*fn5 The Board determined that while Alpena based its request on its composition of aged and diabetic patients, a finding of atypicality also requires consideration of factors such as mortality rates, average length of patient stay, and individual patient diagnoses. Id. at 26.

Considering all these factors, and using Alpena's "own patient analysis," the Board concluded that it was "unable to make a clear determination that [the facility] had an atypical patient mix which justified the incurrence of additional costs per treatment." Accordingly, it held that Alpena had "failed to meet the threshold requirement of patient atypicality" that would justify an exception under 42 C.F.R. § 413.184. Id.

The Board also discussed Alpena's contention that CMS improperly compared its per-treatment nursing hours to a national average of 3.0 hours. The PRRB determined that while Alpena presented some valid criticisms of the 3.0 hours figure, it did not present any data to support an alternative. In contrast, it found that CMS did establish that the average duration of a dialysis session ranged from 3.0 to 3.5 hours. Id. at 27. As a result, it concluded that the 3.0 figure was appropriate "to measure the Provider's atypical service intensity" and that CMS "properly denied [Alpena's] exception request." Id.

The Administrator declined to review the PRRB's order and notified Alpena of that decision on February 17, 2004. Alpena Admin. R. at 1.

2. Plaintiff Chippewa

Like Alpena, Plaintiff Chippewa is a free-standing dialysis facility. It provides ESRD treatment to residents of Sault Ste. Marie, Michigan and surrounding areas, including members of the Sault Ste. Marie Tribe of Chippewa Indians. In March 2000, Chippewa requested an exception in the amount of $31.85 per treatment to its composite rate of $123.96, which would have yielded a revised reimbursement rate of $155.81. Chippewa made its exception request on grounds similar to Alpena's: namely, that it provided atypically intense ESRD services that drove its labor costs higher than the amount allotted in its composite rate. Chippewa's fiscal intermediary, United Government Services, L.L.C. - WI, forwarded the request to CMS with a recommendation that it be approved.

CMS denied the exception request. The agency found that contrary to Chippewa's representations, the average age of its patients -- 61.4 -- was close to the national average of 62.4. Chippewa Admin. R. at 18. Furthermore, while Chippewa had argued that its inpatient treatments lasted longer, on average, than those provided by other facilities, CMS found that Chippewa had improperly included the days of admission and discharge in its calculation. When those days were excluded, the average length of stay for Chippewa's patients of 6.64 days was lower than the national average of 8.30. Id.

The agency also rejected Chippewa's argument that its composite rate failed to cover above-average labor costs. Noting that salaries and employee benefits comprise $47.00 of a facility's composite rate, and that Chippewa's costs were $48.73 per treatment, CMS found that Chippewa did not incur unusually high labor costs. Id. at 21. Finally, as it did in Alpena's case, CMS found that Chippewa's average nursing hours per treatment did not deviate substantially from the national average of 3.0 hours. Id. at 18.*fn6

Chippewa appealed the CMS decision on January 8, 2001. Before the PRRB, it renewed its argument that an atypical intensity of ESRD services justified its exception request. Chippewa alleged, inter alia, that it served a high percentage of aged and diabetic patients and that doing so pushed its labor costs above national norms. Like Alpena, Chippewa also attacked the 3.0 hours figure. Id. at 19-20.

In language similar to that used in the Alpena decision, the PRRB upheld CMS's denial of the request. According to the PRRB, Chippewa's percentage of aged and diabetic patients, though high, was not a "substantial deviation from national norms." The Board also found that the facility had failed to consider other relevant factors in determining whether its population was in fact atypical. For this and other reasons, the PRRB concluded that "[Chippewa] failed to meet its burden of proving that it rendered atypical services to its ESRD patients." Id. at 26.

The Board again noted that the 3.0 hours figure was reasonable and that while Chippewa had pointed out some valid statistical concerns about it, the facility had not ...

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