The opinion of the court was delivered by: John D. Bates United States District Judge
This case involves a dispute about the calculation of Medicare reimbursement for hospital ambulance services. Plaintiffs Decatur County General Hospital and North Memorial Health Care (the "Hospitals") seek judicial review of a final agency action -- the reimbursement decision of the Secretary of the United States Department of Health and Human Services ("Secretary") --pursuant to the Administrative Procedure Act ("APA"). Currently before the Court are the parties' cross-motions for summary judgment. The Hospitals assert that they are entitled to summary judgment because the Secretary's reimbursement decision contravenes the Medicare statute and regulations, and is arbitrary and capricious in violation of the APA. Conversely, the Secretary contends that he is entitled to summary judgment because his ruling is consistent with the text of the Medicare statute and regulations and, in any event, is entitled to deference because it is reasonable. For the reasons set forth below, the Court will deny the Hospitals' motion for summary judgment and will grant the Secretary's motion.
I. Statutory and Regulatory Background
A. The Medicare Cost Reporting and Reimbursement Process
This action arises under Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., commonly referred to as the Medicare Act, which established a federally funded health insurance program for the elderly and disabled. See 42 U.S.C. §§ 1395c, 1395j, 1395k. The Secretary has delegated authority to administer the Medicare program to the Centers for Medicare & Medicaid Services ("CMS"). See 42 U.S.C. §§ 1395h, 1395u. The Medicare Act is divided into four parts, A through D; only Parts A and B are relevant to this case. Part A typically covers "inpatient hospital services" furnished by participating providers. 42 U.S.C. § 1395d(a)(1). Part B covers hospital services furnished to outpatients, physicians' services, and other medical and health services. 42 U.S.C. §§ 1395k(a), 1395x(s). Ambulance services are included within the scope of Part B coverage. 42 U.S.C. § 1395x(s)(7).
Part B services are furnished by "providers of services" that have entered into an agreement with the Secretary. 42 U.S.C. §§ 1395x(u), 1395cc. "Providers of services" include hospitals, critical access hospitals, skilled nursing facilities, comprehensive outpatient rehabilitation facilities, home health agencies, and hospice programs. 42 U.S.C. § 1395x(u). Private insurance companies, known as "fiscal intermediaries," acting as agents of the Secretary, process reimbursements to providers. See 42 U.S.C. § 1395h. At the close of each fiscal year, a provider is required to file a Medicare cost report with its intermediary. 42 C.F.R. §§ 405.1801(b), 413.24(f). The intermediary then audits the cost report and makes a final determination of the total amount of reimbursement owed by Medicare. That final determination is set forth in a "notice of program reimbursement" or "NPR." 42 C.F.R. § 405.1803. If a provider is dissatisfied with a final determination of the Secretary, the provider may request a hearing before the Provider Reimbursement Review Board ("Board" or "PRRB"). 42 U.S.C. § 1395oo(a); see also 42 C.F.R. §§ 405.1807, 405.1835. By request, or on its own motion, a decision by the Board is subject to review by the Secretary's delegate, the Administrator of CMS. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1875. Once a final decision is rendered, the provider may seek judicial review of the final agency decision in federal district court within 60 days. 42 U.S.C. § 1395oo(f)(1).
B. Reimbursement for Ambulance Services
During the early years of the Medicare program, providers were reimbursed for operating costs on the basis of either the "reasonable cost" of providing covered medical services or the "customary charges" for the services, whichever was less. 42 U.S.C. § 1395f(b)(1). Consequently, providers had little incentive to economize because "[t]he more they spent, the more they were reimbursed." Tucson Med. Ctr. v. Sullivan, 947 F.2d 971, 974 (D.C. Cir. 1991).
Congress sought to realign these incentives by adopting a series of reforms designed to promote "efficiency in the provision of services by rewarding cost/effective hospital practices."
H.R. Rep. No. 98-25(I), at 132 (1983), reprinted in 1983 U.S.C.A.A.N. 219, 351. One such reform was section 4531(b)(2) of the Balanced Budget Act ("BBA") of 1997, which mandated the implementation of a national fee schedule for ambulance services furnished as a benefit under Medicare Part B. 42 U.S.C. § 1395m(l); see also 67 Fed. Reg. 9100, 9102 (Feb. 27, 2002).
Because the fee schedule did not take effect immediately,*fn2 however, the statute provided that "[t]he Secretary shall pay for hospital outpatient services that are ambulance services on the basis described in section 1395x(v)(1)(U) of this title, or, if applicable, the fee schedule established under section 1395m(l) of this title." 42 U.S.C. § 1395l(t)(10). Section 1395x(v)(1)(U) provides that ambulance services are to be reimbursed on a reasonable cost basis. See 42 U.S.C. § 1395x(v)(1)(U); see also 67 Fed. Reg. 9100, 9102 (Feb. 27, 2002); 65 Fed. Reg. 55078, 55078 (Sept. 12, 2000). "Reasonable cost" is generally defined under the Medicare Act as "the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." 42 U.S.C. § 1395x(v)(1)(A). In calculating the reasonable cost of ambulance services, the Act also established a cost per trip limit:
In determining the reasonable cost of ambulance services (as described in subsection (s)(7) of this section) provided during fiscal year 1998, during fiscal year 1999, and during so much of fiscal year 2000 as precedes January 1, 2000, the Secretary shall not recognize the costs per trip in excess of costs recognized as reasonable for ambulance services provided on a per trip basis during the previous fiscal year (after application of this subparagraph), increased by the percentage increase in the consumer price index for all urban consumers (U.S. city average) as estimated by the Secretary for the 12-month period ending with the midpoint of the fiscal year involved reduced by 1.0 percentage point.
42 U.S.C. § 1395x(v)(1)(U). Because the cost per trip method relies on "the previous fiscal year" as a baseline for cost calculations, those costs are ...