Plaintiffs, sixty-two Massachusetts hospitals, bring this action against Michael O. Leavitt in his official capacity as Secretary of Health and Human Services. They challenge a change in the method the Secretary employs in calculating the area wage cost index used for reimbursing hospitals under Medicare. This matter is before the Court on Plaintiff's Motion for Summary Judgment [Dkt. No. 17] and Defendant's Cross Motion for Summary Judgment [Dkt. No. 19]. Upon consideration of the Motions, Oppositions, Replies, Surreply, the parties' arguments at the Motions Hearing held on February 6, 2008, and the entire record herein, and for the reasons stated below, Plaintiff's Motion for Summary Judgment is granted and Defendant's Motion for Summary Judgment is denied.
A. Medicare's Reimbursement Scheme
Reimbursement under Medicare is governed by "[a] complex statutory and regulatory regime." Good Samaritan Hosp. v. Shalala, 508 U.S. 402, 404 (1993). Most hospitals are reimbursed under the Prospective Payment System ("PPS"). See 42 U.S.C. § 1395ww(d). Hospitals reimbursed under the PPS are commonly referred to as "subsection (d) hospitals."
Under the PPS, hospitals are reimbursed a specific amount based on a patient's diagnosis (referred to as a diagnosis-related group or "DRG") regardless of the actual costs to treat the patient. Id. The Secretary sets fixed national rates for reimbursement of specific DRGs. Id. These rates are then adjusted for various factors, including the prevailing wage rate in the hospital's geographic area. Id.
To adjust for regional wage variations, the Secretary creates a wage index by performing a "survey...of the wages and wage-related costs of subsection (d) hospitals" on an annual basis. 42 U.S.C. § 1395ww(d)(3)(E)(i).*fn2 The resulting wage index allows for comparison between national wage levels and prevailing wage levels in specific geographic regions. Numerically expressed, regions with an area wage index of less than 1.0 are areas where wage levels are beneath the national average. Conversely, areas with an area wage index over 1.0 have wage levels that are above the national average. Because of the delay in obtaining and analyzing this data, the wage index that applies for a given year is the result of data obtained from hospitals three years earlier. Compl. & Answer ¶ 14.
The specific geographic regions employed in this process are based on criteria provided by the Office of Management and Budget. 42 C.F.R. § 412.64. A particular state may have multiple urban areas, each containing one or more hospitals. All hospitals located in rural areas in a state are grouped into a single rural area. Id.
The wage index applicable to a particular hospital is based on data from the geographic area within which the hospital is found.
42 U.S.C. § 1395ww(d)(3)(E)(i). However, there is an exception to this rule. An urban area's wage index may not fall lower than the rural wage index established for that state. Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4410, 111 Stat. 251, 402 (1997). Although most hospitals are reimbursed under the PPS, critical access hospitals ("CAHs") are not. CAHs are of limited size, provide acute care to their patients, and are generally located in rural areas. 42 U.S.C. § 1395i-4(c)(2)(B). Instead of receiving payments under the PPS, CAHs receive 101% of their actual reasonable costs. 42 U.S.C. § 1395m(g)(1). Subsection (d) hospitals may elect to become CAHs if they meet the appropriate statutory requirements. 42 U.S.C. § 1395i-4(e).
B. The Secretary's Decision to Exclude Data from Subsection (d) Hospitals that Later Became CAHs from the Wage Index for Fiscal Year 2004
CAHs were first created in 1997 as an overlay to the existing Medicare reimbursement scheme. From 1997 to 2003, the Secretary included in his periodic wage surveys wage data from hospitals that had become CAHs. See Proposed Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2004 Rates, 68 Fed. Reg. 27,154, 27,190 (proposed May 19, 2003).
The Secretary changed this approach for Fiscal Year 2004. In a notice of proposed rulemaking issued on May 19, 2003, the Secretary requested comment regarding whether wage data from subsection (d) hospitals that were later redesignated as CAHs should be excluded from the wage index calculation. Id. This request for comment was a result of "correspondence [received by the Secretary] suggesting that the wage data for hospitals that have subsequently been redesignated as CAHs should be removed from the wage index calculation because CAHs are unique compared to other short-term, acute care hospitals." Id.
Commenters generally supported removing data from hospitals that had become CAHs after the survey year from the wage index, although several were critical of the proposal. Changes to the Hospital Inpatient Prospective Payment Systems and Fiscal Year 2004 Rates, 68 Fed. Reg. 45,346, 45,397 (Aug. 1, 2003). The Secretary chose to exclude CAH data from the wage calculation and offered the following rationale:
CAHs represent a substantial number of hospitals with significantly different labor costs in many labor market areas where they exist. Using data collected for the proposed FY 2004 wage index, we found that, in 89 percent of all labor market areas with hospitals that converted to CAH status some time after FY 2000, the average hourly wage for CAHs is lower than the average hourly wage for other short-term hospitals in the area. In 79 percent of the labor market areas with CAHs, the average hourly wage for CAHs is lower than the average hourly wage for other short-term hospitals by 5 percent or greater. These results suggest that the wage data for CAHs, in general, are significantly different from other short-term hospitals.
The Secretary also analyzed the potential redistributive effect of removing CAH data from the wage index and made the following findings:
Further, we found that removing CAHs from the wage index would have a minimal redistributive effect on Medicare payments to hospitals. The majority of the labor market areas would decrease by only 0.30 percent in their wage index value....Only 10 areas would experience a decrease in their wage index values greater than 0.30 percent. The greatest negative impact is 9.57 percent. Meanwhile, positive impacts occur in 48 areas, 30 of which are in rural areas. Overall, removing CAHs from the wage index would have a minimal redistributive effect on Medicare payments to hospitals.
Based on these findings, the Secretary concluded that "removing CAHs from the wage index is prudent policy, given the substantial negative impact these hospitals have on the wage indexes in the areas where they are located and the minimal impact they have on the wage indexes of other areas." Id.
Therefore, beginning with the FY 2004 wage index, we are excluding from the wage index the wages and hours for all hospitals that are currently designated as a CAH, even if the hospital was paid under the IPPS during the cost reporting period used in calculating the wage index. We believe that this change improves the overall equity of the wage index.
However, this change applied only to subsection (d) hospitals that later converted to CAH status, and not to hospitals that converted to other provider types or to institutions that had subsequently closed.
We note that we would continue to include the wage data for other terminating or converting hospitals for the period preceding their change in Medicare provider status, as long as those data do not fail any of our edits for reasonableness. This is because we continue to believe that the wage data for these hospitals, unlike CAHs, are not necessarily unique compared to other short-term hospitals, and these terminating or converting hospitals provide an accurate reflection of the labor market area during the relevant past period.
This change was first implemented for the wage index for Fiscal Year 2004, which is not challenged by Plaintiffs. Instead, they challenge the calculation of the Fiscal Year 2005 ...