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St. Michael's Medical Center v. Sebelius

August 26, 2009


The opinion of the court was delivered by: Emmet G. Sullivan United States District Judge


Plaintiffs are twenty-two urban hospitals seeking additional reimbursement from the Secretary of Health and Human Services ("defendant" or the "Secretary") for inpatient services plaintiffs provided to Medicare beneficiaries during fiscal years ("FY") 2000 and 2001.*fn2 The parties filed cross motions for summary judgment, which this Court referred to a magistrate judge for a Report and Recommendation. Now pending before the Court are the parties' objections to the Report and Recommendation. Upon careful consideration of the Report and Recommendation, the parties' objections and responses to objections, the cross motions, responses and replies thereto, the applicable law, the entire record herein, and for the reasons stated below, the Court rejects the magistrate judge's recommendations, GRANTS defendant's motion for summary judgment, and DENIES plaintiffs' motion for summary judgment.


A. Medicare Reimbursement and the Prospective Payment System

The Medicare program, established by Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., pays for covered medical services provided to eligible aged and disabled persons. Part A of the Medicare program authorizes payments for, among other things, certain inpatient hospital services. See id. §§ 1395c, 1395d. The Centers for Medicare and Medicaid Services ("CMS") (formerly known as the Health Care Financing Administration ("HCFA")) is the agency within the Department of Health and Human Services that has been designated by the Secretary to administer the Medicare program. CMS, in turn, has delegated many of Medicare's audit and payment functions to fiscal intermediaries, who are generally private insurers. See id. § 1395h.

Although hospitals used to be reimbursed for their actual costs in treating beneficiaries (as long as those costs were reasonable), most hospitals are now reimbursed through the Prospective Payment System ("PPS"). See id. § 1395ww(d). Under the PPS, hospitals are "paid fixed rates for providing specific categories of treatment, known as 'diagnosis related groups,' or 'DRGs.'" Bellevue Hosp. Ctr. v. Leavitt, 443 F.3d 163, 168 (2d Cir. 2006) (citing 42 U.S.C. § 1395ww(d)). Medicare administrators develop these rates by setting a "standard nationwide cost rate -- the 'federal rate' -- based on the average operating costs of inpatient hospital services. They then assign a weight to each category of inpatient treatment, or [DRG]." Methodist Hosp. of Sacramento v. Shalala, 38 F.3d 1225, 1227 (D.C. Cir. 1994) (internal citation omitted). A hospital's final reimbursement per patient is determined by multiplying the patient's DRG and the federal rate, after that rate has been "standardized" by making adjustments based on a variety of factors. See 42 U.S.C. § 1395ww(d)(2)(C) (listing the factors used for standardization).

To account for regional variations in labor costs, the Secretary adjusts the labor-related portion of the federal rate by a geographically specific factor commonly referred to as the "wage index." See 42 U.S.C. § 1395ww(d)(3)(E)(i). Specifically, § 1395ww(d)(3)(E)(i) states that 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 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.

Id.; see also Robert Wood Johnson Univ. Hosp. v. Shalala, 297 F.3d 273, 276 (3d Cir. 2002) ("The wage index compares the average hourly wage for hospitals in a given geographic area with the national average hourly wage, which in turn determines the payment rate above or below the national average at which a hospital is reimbursed. The wage-index for an area generally applies to all hospitals physically located within that geographic area." (internal citation omitted)).

B. Geographic Classification, Reclassification, and the Impact on the Wage Index

For the purposes of the wage index, the Secretary classifies a hospital as being located in either an urban or rural area using Metropolitan Statistical Areas ("MSAs"), as defined by the Executive Office of Management and Budget. See 42 C.F.R. § 412.64. Recognizing that these geographic classification procedures impose a burden on some hospitals,*fn3 Congress amended the Medicare statute "to allow a hospital to seek reclassification from its geographically-based wage area to a nearby wage area for payment purposes if it meets certain criteria." Robert Wood Johnson, 397 F.3d at 276. The current reclassification provisions permit a rural hospital that meets those criteria to reclassify as urban, and qualifying urban hospitals to reclassify either as rural or to another higher-wage urban area. See 42 U.S.C. §§ 1395ww(d)(8)(B)(i) & (d)(10); 42 C.F.R. §§ 412.230-412.235. Congress also created the Medicare Geographic Classification Review Board, a five-member entity that reviews reclassification applications and, based on the specified requirements, decides whether an applicant is eligible for reclassification. See 42 U.S.C. § 1395ww(d)(10); 42 C.F.R. § 412.230.

Both Congress and the Secretary have recognized that hospital reclassification can substantially impact the wage index for both the geographic area from which a hospital originates and the new area into which the hospital classifies. The Medicare program therefore provides for circumstances when the wage index data for an incoming rural hospital must be excluded from the wage index of the urban area it is entering. 42 U.S.C. § 1395ww(d)(8)(C)(i)(I)-(II). Likewise, Congress implemented a provision to prevent the wage index of a rural area from decreasing when a hospital originating from that area reclassifies into an urban area.*fn4 See id. § 1395ww(d)(8)(C)(ii). No such statutory provision exists for urban areas, but no reclassification may result in the reduction of a wage index of any county below that of the State's rural areas.*fn5 See id. § 1395ww(d)(8)(C)(iii); see also Def.'s Objections to Magistrate Judge's Report & Recommendation ("Def.'s Objections") at 5 ("[T]he Act is silent with respect to how to calculate the wage index for an urban area after a hospital has reclassified to another area . . . ."). Plaintiffs in this lawsuit challenge the Secretary's since-changed practice of calculating the wage index for urban areas without including data from hospitals that have reclassified into higher-wage areas.

C. Reclassification and Urban Wage Indexes

The Secretary annually publishes rules in the Federal Register setting forth both the methodology for calculating the wage index and the wage indexes themselves. Beginning in 1991, the Secretary publicly acknowledged the increase in urban reclassifications and, through notice and comment rulemaking, considered various methods to calculate the wage index for urban areas in the wake of such reclassifications. Despite proposals to implement a "hold harmless" provision for urban hospitals similar to the statutory provision in place for rural areas, the Secretary repeatedly declined to do so. See, e.g., 65 Fed. Reg. 47054, 47077 (Aug. 1, 2000) ("[E]xcept for those rural areas in which redesignation would reduce the rural wage index value, the wage index value for each area is computed exclusive of the wage data for hospitals that have been redesignated from the area for purposes of their wage index."); 56 Fed. Reg. 43196, 43221 (Aug. 30, 1991) ("[W]e considered . . . provid[ing] the same 'hold harmless' protection that the statute affords to rural areas when hospitals are reclassified from those areas. That is, we considered providing that the wage index value for an urban area could not be reduced due to the reclassification of hospitals from that area. However, we do not believe this action would be appropriate.").

In 2001, however, the Medicare Payment Advisory Commission ("MedPAC") issued a report to Congress recommending that the Medicare statute be amended to provide a "hold harmless" provision for urban areas. See Def.'s S.J. Mem. at 10-11 (citing Medicare Payment Advisory Comm'n, Report to the Congress:

Medicare Payment Policy 82 (Mar. 2001), documents/Mar01%20Entire%20report.pdf ("MedPAC Report"), and describing the contents of the report). The report expressed MedPAC's opinion that the Secretary had the authority to make such a change by way of regulation, but noted that the agency had been "reluctant" to do so. MedPAC Report at 83 ("HCFA appears to have the authority to make this change through regulation. However, because the protection for nonreclassified rural hospitals was enacted legislatively and Congress has not legislated such protection for urban hospitals, HCFA has thus far been reluctant to make the change itself.").

Shortly thereafter, the Secretary did in fact propose implementing a "hold harmless" provision for urban areas, and discussed the MedPAC Report and its findings in the proposed rule. See 66 Fed. Reg. 22646, 22678 (May 4, 2001). The rule was adopted in August 2001 and has been in effect since FY 2002. See 66 Fed. Reg. 39828, 39865 (Aug. 1, 2001) ("Currently, the wage index value for an urban area is calculated exclusive of the wage data for hospitals that have been reclassified to another area. For the FY 2002 wage index, we include the wage data for a reclassified urban hospital in both the area to which it is reclassified and the MSA where the hospital is physically located.").

D. Administrative and Judicial Review

To receive reimbursement for services, hospitals file "cost report[s]" with their intermediaries at the end of each fiscal year. 42 C.F.R. § 405.1801(b)(1). Intermediaries then audit the reports and determine the reimbursement amount owed to the providers. That determination is memorialized in a Notice of Program Reimbursement and issued to the provider. Id. § 405.1803(a)(2).

A hospital or group of hospitals dissatisfied with an intermediary's reimbursement determination may file an appeal with the Provider Review Reimbursement Board ("PRRB"). See 42 U.S.C. § 1395oo(a)-(b). The PRRB is "an administrative review panel that has the power to conduct an evidentiary hearing and affirm, modify, or reverse the intermediary's [reimbursement] determination." Your Home Visiting Nurse Servs., Inc. v. Shalala, 525 U.S. 449, 451 (1999). Additionally, both the statute and the corresponding regulations provide a mechanism for the PRRB to grant expedited judicial review ("EJR") where the PRRB determines that it lacks the authority to decide a legal issue:

Providers shall . . . have the right to obtain judicial review of any action of the fiscal intermediary which involves a question of law or regulations relevant to the matters in controversy whenever the Board determines (on its own motion or at the request of a provider of services . . . ) that it is without authority to decide the question, by a civil action ...

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