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Southeast Alabama Medical Center v. Leavitt

March 26, 2008


The opinion of the court was delivered by: Richard W. Roberts United States District Judge


Plaintiffs, 113 hospitals located in Alabama, Louisiana and Mississippi, bring a challenge under the Administrative Procedure Act, 5 U.S.C. §§ 701-706, to certain regulations implementing a provision of the Medicare Act, specifically 42 U.S.C. § 1395ww(d)(3)(E), arguing that the defendant Secretary of the Department of Health and Human Services exceeded his lawful authority in adopting them. The Secretary has filed a motion for summary judgment, and the hospitals have filed a cross-motion. Because the hospitals have not established that a genuine issue exists that the Secretary's regulations were unambiguously forbidden by the statute or otherwise unreasonable, their motion will be denied and the Secretary's motion will be granted.


The hospitals challenge regulations that the Secretary adopted in 2002 and 2003 under the governing provision of the Medicare Act to determine certain payments to hospitals for fiscal years 2003 and 2004. (See Compl. ¶¶ 20-26.) The text of the statute that is at the center of this dispute is:

(E) The Secretary shall adjust the proportion, (as estimated by the Secretary from time to time) of hospitals' costs which are attributable to wages and wage-related costs, of the DRG*fn1 prospective payment rates computed under subparagraph (D) for area differences in hospital wage levels by a factor (established by the Secretary) reflecting the relative hospital wage level in the geographic area of the hospital compared to the national average hospital wage level. Not later than October 1, 1990, and October 1, 1993 (and at least every 12 months thereafter), the Secretary shall update the factor under the preceding sentence on the basis of a survey conducted by the Secretary (and updated as appropriate) of the wages and wage-related costs of subsection (d) hospitals in the United States. Not less often than once every 3 years the Secretary (through such survey or otherwise) shall measure the earnings and paid hours of employment by occupational category and shall exclude data with respect to the wages and wage-related costs incurred in furnishing skilled nursing facility services. Any adjustments or updates made under this subparagraph for a fiscal year (beginning with fiscal year 1991) shall be made in a manner that assures that the aggregate payments under this subsection in the fiscal year are not greater or less than those that would have been made in the year without such adjustment.

42 U.S.C. § 1395ww(d)(3)(E) (effective Dec. 21, 2000 to Dec. 7, 2003). The "factor" ("Factor") referred to in the statute,*fn2 is a ratio constructed of elements not precisely prescribed in the statute. The "proportion" ("Proportion")*fn3 of hospital costs, also referred to in the statute, is also a construct of elements not precisely prescribed in the statute. The Factor and the Proportion are key determinants of a hospital's Medicare Payments.

In 1987, Congress acknowledged the desirability of accounting for occupational mix in the Factor and, by amending an earlier version of this statute, directed the Secretary to "measure the earnings and paid hours of employment by occupational category," but only "to the extent deemed feasible by the Secretary." (Pls.' Mot. for Summ. J. ("Pls.' Mot.") at 75.) "It appears that when given such discretion, the Secretary never found it feasible to [account for occupational mix]." Bellevue Hosp. Ctr. v. Leavitt, 443 F.3d 163, 172 n.10 (2d Cir. 2006) (citing Final Rules, 66 Fed. Reg. 39,828, 39,860 (Aug. 1, 2001) (noting that the Secretary had previously determined that the collection of the occupational mix data would be "costly and difficult")). In 2000, the Secretary's discretion in the matter was curtailed with another amendment that required the Secretary to measure occupational mix at least once every three years, and to collect the necessary data by September 30, 2003 for application on October 1, 2004. (Def.'s Opp'n at 42 & n.32.)

In support of their motion for summary judgment, the hospitals argue that the Secretary violated the law in five ways. First, they contend that the express language of the statute limits the elements comprising the Proportion to wages and wage-related costs, and that the Secretary's regulation impermissibly includes elements in the Proportion that cannot reasonably be considered wage or wage-related costs. (Pls.' Mot. at 5.) Second, they argue that the statute's text expressly limits the Proportion to those things that vary locally. (Id.) The hospitals' third argument is that the Secretary's definition of wage and wage-related costs varies between the Factor and the Proportion, and is therefore an impermissible construction of the statute's terms. (Id. at 6.) In addition, the hospitals maintain that the Secretary's delay in developing an occupational mix for incorporation into the calculation of the Factor was unreasonable. (Id.) Finally, they assert that the Factor calculation is unreasonable because it fails to take account of interstate employment in the hospitals' labor force. (Id.) The Secretary has also filed a motion for summary judgment, in which he disputes the hospitals' conclusions and defends his regulations as not unambiguously forbidden or unreasonable, and well within the discretion he was accorded by law.


The plaintiff hospitals bring this action under 42 U.S.C. § 1395oo(f), after having allegedly exhausted their administrative remedies before the Provider Reimbursement Review Board. (Compl. ¶ 1.) A challenge to agency action is reviewed under the two-step analysis articulated in Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). Where the statute is unambiguous, the question is whether the secretary has complied with the requirements of the statute. Where the statute is silent or ambiguous, the question is whether the secretary's construction of the statute is reasonable. Bellevue, 443 F.3d at 174 (citing Chevron, 467 U.S. at 842-43). In short, a challenge to a regulation implementing a statute will succeed only if the statutory text "unambiguously forbids" the secretary's interpretation or if the interpretation otherwise "exceeds the bounds of the permissible." Barnhart v. Walton, 535 U.S. 212, 218 (2002) (citing Chevron, 467 U.S. at 843). "[I]t is axiomatic that [a secretary's] interpretation need not be the best or most natural one[,]" Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 702 (1991), provided it falls "within the bounds of reasonable interpretation." Your Home Visiting Nurse Servs., Inc. v. Shalala, 525 U.S. 449, 453 (1999) (citing Chevron, 467 U.S. at 842). The parties agree that the intent of Congress is clear from the text of the statute. (Pls.' Mot. at 26; Def.'s Mot. at 33.)

Summary judgment may be granted only where the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c); Burke v. Gould, 286 F.3d 513, 517 (D.C. Cir. 2002). The relevant inquiry "is the threshold inquiry of determining whether there is a need for a trial ---- whether, in other words, there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). A material fact is one that is capable of affecting the outcome of the litigation. Id. 477 U.S. at 248. A genuine issue is one where the "evidence is such that a reasonable jury could return a verdict for the nonmoving party," id., as opposed to evidence that "is so one-sided that one party must prevail as a matter of law." Id. at 251-52. In considering a motion for summary judgment, all "justifiable inferences" from the evidence are to be drawn in favor of the non-movant. Id. at 255. The party opposing summary judgment must "come forward with 'specific facts showing that there is a genuine issue for trial.'" Id. at 587 (citing Fed. R. Civ. P. 56(e)) (emphasis in original). In the end, "the plain language of Rule 56(c) mandates the entry of summary judgment . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).

Here, then, the disposition of the parties' motions turns on the existence of any genuine issue as to whether the Secretary's interpretation of the statute, as reflected by the implementing regulations employed, was unambiguously forbidden or unreasonable.


The hospitals argue that the Secretary's construction of the wage and wage-related cost elements included in the Proportion is unreasonable in light of the express language of the statute. Wages and wage-related costs are terms that are not defined in the statute. The hospitals contend that "fringe benefits, professional fees [such as those charged by national accounting firms], contract labor, . . . business services, and [other] labor-intensive services [such as those charged by landscaping services]," which are elements included in the Proportion, are not fairly contemplated by the statute's terms "wages" and "wage-related costs."*fn4 (Pls.' Mot. at 14 (bracketed material in the original).) More specifically, they argue that the cost of workers compensation insurance and fringe benefits ---- including ...

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