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Catholic Health Initiatives v. Sebelius

September 30, 2009

CATHOLIC HEALTH INITIATIVES, ET AL., PLAINTIFFS,
v.
KATHLEEN SEBELIUS, SECRETARY, UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, DEFENDANT.*FN1



The opinion of the court was delivered by: Paul L. Friedman United States District Judge

OPINION

This matter is before the Court on the parties' cross motions for summary judgment. Plaintiffs, a hospital group, brought this action seeking judicial review of the Secretary of Health and Human Service's denial of reimbursement under the Medicare statute for certain insurance premium payments made by plaintiffs. After careful consideration of the parties' papers, the attached exhibits, and the entire record in the case, the Court will grant defendant's motion for summary judgment in its entirety.*fn2

I. BACKGROUND

The Medicare Act, Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq., creates a federally funded health insurance program for the elderly and disabled. The Centers for Medicare and Medicaid Services ("CMS") is the component of the Department of Health and Human Services that administers the Medicare program for the Secretary. Part A of the Medicare Act reimburses hospitals for the operating costs of certain inpatient services. See 42 U.S.C. § 1395ww. In order to obtain this reimbursement, eligible hospitals file cost reports with their "fiscal intermediaries," allocating a portion of those costs to Medicare. See 42 C.F.R. § 413.20. The intermediaries determine the amount owed by the Secretary to the hospitals for the fiscal year at issue. See 42 C.F.R. § 405.1803(a). Hospitals may appeal the payment determination to the Provider Reimbursement Review Board (the "Board") within 180 days. See 42 U.S.C. § 1395oo(a). The Board may reverse, affirm or modify the intermediary's decision; similarly, the Secretary subsequently may reverse, affirm or modify the Board's decision. See 42 U.S.C. §§ 1395oo(d) and (f)(1). Hospitals still dissatisfied with the final decision may seek judicial review by filing suit in the appropriate United States district court. See 42 U.S.C. § 1395oo(f); In re Medicare Reimbursement Litig., 414 F.3d 7, 8 (D.C. Cir. 2005).

Provider hospitals receive reimbursement for the "reasonable cost" of Medicare services provided. 42 U.S.C. § 1395x(v)(1)(A). Following her statutory directive, the Secretary of Health and Human Services promulgated regulations outlining principles for reasonable cost reimbursement. See 42 C.F.R., Part 413. The Secretary also created a manual, called the Provider Reimbursement Manual ("PRM"), to provide further detail to fiscal intermediaries to determine appropriate reimbursement. See Pl. Mot., Ex. 1, excerpts of U.S. Dept. of Health and Human Services, Medicare Provider Reimbursement Manual ("PRM"). Premiums that hospitals pay for malpractice insurance allocable to Medicare costs generally are reimbursable. See PRM § 2162.2.A. The PRM disallows from reimbursement, however, insurance liability premiums paid to captive insurers (those that are wholly-owned by the provider hospitals) that are domiciled offshore and invest more than ten percent of their assets in equity securities. See PRM § 2162.2.A.4.

Plaintiff Catholic Health Initiatives ("CHI") is a non-profit health care organization based in Denver, Colorado. See Def. Mot., Statement of Material Facts as to which there is no Genuine Dispute ("Def. Facts") ¶ 1. The plaintiff hospitals are fifty-five Medicare participating hospitals. See Def. Facts ¶ 2. Plaintiff hospitals paid premiums to First Initiatives Insurance Ltd. ("FIIL") for malpractice, other liability and workers' compensation coverage for the Medicare cost reporting periods ending in 1997 through 2002. See Def. Facts ¶¶ 3-4. FIIL is a captive insurer, wholly-owned by CHI, and domiciled in the Cayman Islands. See Def. Facts ¶¶ 3, 5. FIIL invests forty to fifty percent of its assets in equity securities. See Def. Facts ¶ 6.

Based on PRM § 2162.2.A.4, plaintiffs self-disallowed the premiums they paid to FIIL on their Medicare cost reports. See Def. Facts ¶ 8. Plaintiffs then requested a hearing challenging their self-disallowance of these insurance premiums, which the Board conducted on November 4, 2004. See Def. Facts ¶¶ 10, 12. On January 24, 2007, the Board issued a decision upholding the disallowance of the insurance premiums paid to FIIL. See Def. Facts ¶ 13. On March 9, 2007, the CMS Administrator declined to review the Board decision, essentially upholding it. See Def. Facts ¶ 17. Plaintiffs filed suit in this Court on March 20, 2007.

II. STANDARD OF REVIEW

Summary judgment may be granted "if the pleadings, the discovery and disclosure materials on file, and any affidavits [or declarations] show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law." FED. R. CIV. P. 56(c). In a case involving review of a final agency action under the Administrative Procedure Act, 5 U.S.C. § 706, however, the Court's role is limited to reviewing the administrative record, so the standard set forth in Rule 56(c) does not apply. See Cottage Health System v. Sebelius, Civil Action No. 08-0098, 2009 U.S. Dist. LEXIS 57696 at *17 (D.D.C. July 7, 2009) (citing North Carolina Fisheries Ass'n v. Gutierrez, 518 F. Supp. 2d 62, 79 (D.D.C. 2007)); see also 42 U.S.C. § 1395oo(f)(1) (providing that judicial review of provider reimbursement under the Medicare Act shall be made under APA standards). "Under the APA, it is the role of the agency to resolve factual issues to arrive at a decision that is supported by the administrative record, whereas 'the function of the district court is to determine whether or not as a matter of law the evidence in the administrative record permitted the agency to make the decision it did.'" Cottage Health System v. Sebelius, 2009 U.S. Dist. LEXIS 57696 at *17 (quoting Occidental Eng'g Co. v. INS, 753 F.2d 766, 769-70 (9th Cir. 1985)). Summary judgment serves as "the mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and otherwise consistent with the APA standard of review", but the normal summary judgment standard does not apply. See id. at *18; see also Fund for Animals v. Babbitt, 903 F. Supp. 96, 105 (D.D.C. 1995).

The standard of review under the APA "'is a highly deferential one. It presumes agency action to be valid.'" Humane Soc'ty of the United States v. Kempthorne, 579 F. Supp. 2d 7, 12 (D.D.C. 2008) (quoting Ethyl Corp. v. EPA, 541 F.2d 1, 34 (D.C. Cir. 1976)). Nevertheless, a reviewing court must set aside agency actions, findings, or conclusions when they are arbitrary, capricious, an abuse of discretion, otherwise not in accordance with law, or unsupported by substantial evidence. See 5 U.S.C. § 706(2)(A) and (E); Marsh v. Oregon Natural Resources Council, 490 U.S. 360, 375 (1989). Agency action is arbitrary and capricious if the agency relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.

Motor Vehicle Mfrs. Assoc. v. State Farm Mutual Auto. Insurance Co., 463 U.S. 29, 43 (1983).

As explained in greater detail below, plaintiffs' principal argument calls into question the Secretary's interpretation of the Medicare statute and regulations. When the action under review involves an agency's interpretation of a statute that the agency is charged with administering, the court applies the familiar analytical framework set forth in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). "Under step one of Chevron, [the court] ask[s] whether Congress has directly spoken to the precise question at issue, in which case [the court] must give effect to the unambiguously expressed intent of Congress." Secretary of Labor, Mine Safety and Health Admin. v. Nat'l Cement Co. of California, Inc., 494 F.3d 1066, 1073 (D.C. Cir. 2007) (internal quotation marks and citation omitted); see also Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. at 842-43. If, after employing the tools of statutory construction, the court concludes that "the statute is silent or ambiguous with respect to the specific issue..., [the court] move[s] to the second step and defer[s] to the agency's interpretation as long as it is 'based on a permissible construction of the statute.'" Secretary of Labor, Mine Safety and Health Admin. v. Nat'l Cement Co. of California, Inc., 494 F.3d at 1074 (quoting Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. at 843).

As this Court has previously explained, in the District of Columbia Circuit, "Chevron step two review is similar to (but conceptually distinct from) the standard 'arbitrary and capricious style analysis' described [above]." Humane Society v. Kempthorne, 579 F. Supp.2d at 12-13 (quoting Continental Airlines Inc. v. DOT, 843 F.2d 1444, 1452 (D.C. Cir. 1988)). Thus, a "'reasonable' explanation of how an agency's interpretation serves the statute's objectives is the stuff of which a 'permissible' construction is made...; an explanation that is 'arbitrary, capricious, or manifestly contrary to the statute,' however, is not." Northpoint Technology Ltd. v. FCC, 412 F.3d 145, 151 (D.C. Cir. 2005) (quoting Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. at 844). "'Reasonableness' in this context means... the compatibility of the agency's interpretation with the policy goals... or objectives of Congress." Continental Airlines Inc. v. DOT, 843 F.2d at 1452. As a result, "the critical point is whether the agency ...


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