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Alta Bates Summit Medical Center v. Sebelius

October 8, 2009


The opinion of the court was delivered by: Colleen Kollar-kotelly United States District Judge


This is an action for judicial review of a decision of the Provider Reimbursement Review Board ("PRRB" or "Board"), an entity within the United States Department of Health & Human Services ("HHS") whose decision in this case became final when Defendant Secretary of HHS (the "Secretary") did not act on it within 60 days. Plaintiff Alta Bates Summit Medical Center ("Alta Bates") seeks to set aside the PRRB's determination of the appropriate base year for calculating Medicare reimbursement costs for Alta Bates' geriatric psychiatric unit. Alta Bates and the Secretary have filed cross-motions for summary judgment. For the reasons explained below, the Court shall award summary judgment to the Secretary.


The essential facts underlying this action are not in dispute. Alta Bates is a not-for-profit corporation that operates an acute care hospital in Oakland, California (known at all relevant times as Summit Medical Center) and is certified by the Medicare program as a "provider of services" to Medicare patients. Pl.'s Stmt.*fn2, ¶¶ 1-2. In 1997, Alta Bates opened a geriatric inpatient psychiatric unit providing services to patients 65 years of age or older and patients 55 years of age or older who have disabilities recognized by Medicare. Id., ¶ 4. Alta Bates had previously operated a Medicare-certified inpatient psychiatric unit that it acquired during a merger in 1992, but that unit ceased operations in June 1992, and Alta Bates subsequently removed psychiatric services from its state license. Id., ¶¶ 10-12. Alta Bates did not have an active psychiatric unit again until March 1997. Id., ¶ 12. The "new" geriatric psychiatric unit occupied the same building as the "old" unit that had closed.*fn3 Def.'s Stmt., ¶ 11.

Medicare certified Alta Bates' new psychiatric unit effective March 1, 1997 and classified it as a unit excluded from Medicare's Prospective Payment System ("PPS"). Pl.'s Stmt., ¶ 5. Although PPS replaced the "reasonable cost" reimbursement scheme that had led to skyrocketing costs, Congress excluded certain types of hospital units from PPS because of their atypical patient populations. See Transitional Hospitals Corp. of La., Inc. v. Shalala, 222 F.3d 1019, 1021 (D.C. Cir. 2000). Thus, inpatient psychiatric hospital units could be certified by Medicare as PPS-excluded units and be reimbursed on a reasonable cost basis.*fn4 Id. Under the reasonable cost regime, a provider is reimbursed for "the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of need health services...." 42 U.S.C. §§ 1395(f)(b)(1), 1395x(v)(1)(A).

The reasonable cost regime applicable to PPS-excluded psychiatric units was modified by the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), which placed new limits on reasonable cost reimbursement. See Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, § 1010(a)(1), 96 Stat. 324, 331-35 (codified at 42 U.S.C. § 1395ww(b)). Under TEFRA, hospitals are given financial incentives to keep costs below a "target amount" and penalized when costs exceeded that amount. See 42 U.S.C. § 1395ww(b). A hospital's TEFRA target amount is determined by the amount of allowable operating costs of inpatient hospital services during the year before TEFRA applied to the unit (known as the "base period" or "base year"), plus an annual percentage increase designed to adjust for inflation. See id. § 1395ww(b)(3)(A). Thus, the amount of costs incurred during the base year is critical to determining the reimbursement rates for hospital units that are excluded from PPS.

After Alta Bates acquired its "old" psychiatric unit in 1992, it reported that the unit was subject to a TEFRA target amount. Def.'s Stmt., ¶ 7.*fn5 The base year that had been established for that "old" unit was 1984. See Def.'s Stmt., ¶ 15; Pl.'s Stmt., ¶ 8. When Alta Bates submitted its first cost report for its new geriatric psychiatric facility in 1998, it reported the unit as a new unit excluded from PPS and subject to the cost-based reimbursement with no existing TEFRA target rate limit applied. Pl.'s Stmt., ¶ 6. When Alta Bates was initially audited by the Medicare fiscal intermediary*fn6 for that fiscal year, the auditors concluded that the proper TEFRA base year should be the fiscal year ending February 28, 1998.*fn7 Pl.'s Stmt., ¶ 7. However, the intermediary subsequently determined that the proper TEFRA base year for the new unit was 1984--the base year that had been established for the "old" unit previously operated by Alta Bates. Pl.'s Stmt., ¶ 8. By applying the base year cost of $4555.42 per discharge and updating it by annual percentage increases, the intermediary determined that the per discharge target amount was $7434.31, resulting in a reimbursement per discharge of $8177.74. Id., ¶¶ 14-15. By contrast, the actual cost per Medicare discharge at Alta Bates' geriatric psychiatric unit was $16,108.41 for the 1998 cost year. Id., ¶ 14. The intermediary took a similar approach in the 1999 cost year, resulting in a per discharge reimbursement of $10,534 compared to actual costs of $13,277.92 per discharge. Id., ¶ 16.

Alta Bates appealed the intermediary's adjustments to the Provider Reimbursement Review Board, a five-person panel within HHS that hears Medicare reimbursement disputes. The PRRB heard the appeal on July 17, 2007. Def.'s Stmt., ¶ 17. On April 15, 2008, the Board rendered a decision affirming the intermediary's decision to utilize 1984 as the TEFRA base year for Alta Bates' psychiatric unit. Id., ¶ 19. Alta Bates appealed to the Administrator of the Centers for Medicare & Medicaid Services (CMS), who declined to review the Board's decision. Id., ¶ 23. The Board's decision thus became the final decision of the Secretary. See 42 U.S.C. § 1935oo(f)(1). Alta Bates brought this action seeking judicial review of the Board's decision.


When reviewing a decision of the PRRB, the court shall follow the standard of review set forth in the Administrative Procedure Act. See 42 U.S.C. § 1395oo(f)(1). Under that standard, the court shall "hold unlawful and set aside agency action, findings, and conclusions found to be... arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2). "'The party challenging an agency's action as arbitrary and capricious bears the burden of proof.'" City of Olmstead Falls v. Fed. Aviation Admin., 292 F.3d 261, 271 (D.C. Cir. 2002) (quoting Lomak Petroleum, Inc. v. Fed. Energy Regulatory Comm'n, 206 F.3d 1193, 1198 (D.C. Cir. 2000)). The Court need not find that the agency's decision is "'the only reasonable one, or even that it is the result [the Court] would have reached had the question arisen in the first instance in judicial proceedings.'" Am. Paper Inst., Inc. v. Am. Elec. Paper Serv. Corp., 461 U.S. 402, 422 (1983) (quoting Unemployment Compensation Comm'n v. Aragon, 329 U.S. 143, 153)). The Court's review is limited to the administrative record. Bloch v. Powell, 227 F. Supp. 2d 25, 30 (D.D.C. 2002).

The court "must give substantial deference to an agency's interpretation of its own regulations." Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). The court's "task is not to decide which among several competing interpretations best serves the regulatory purpose." Id. Rather, the agency's interpretation is controlling "unless it is plainly erroneous or inconsistent with the regulation." Id. (citations omitted). Broad deference is all the more warranted where the regulation concerns a complex and technical regulatory program such as Medicare. See id. (applying deferential standard to the Secretary's construction of Medicare reimbursement issues before the PRRB).


At issue in this case is the PRRB's interpretation of two specific regulatory provisions that govern the determination of the proper base period for PPS-excluded hospital units under TEFRA. The first provision, 42 C.F.R. § 413.40(b)(1)(i) (hereafter "subsection (i)"), states that once a TEFRA target amount is established for a particular excluded unit, that target amount remains applicable to the unit despite intervening cost periods in which the unit is either not subject to TEFRA or not participating in the Medicare program. The second provision, 42 C.F.R. § 413.40(b)(1)(ii) (hereafter "subsection (ii)"), states that the base period for a "newly established excluded unit" is the first cost reporting period of at least 12 months following the new unit's certification to participate in Medicare. The PRRB determined that subsection (i) applies in this case because Alta Bates previously operated a psychiatric unit with an established TEFRA target amount, and that amount remains applicable despite the unit's nonparticipation in the Medicare program from 1992 to 1997. See Administrative Record ("AR") at 38 (PRRB Decision). Alta Bates contends that subsection (i) cannot apply because its geriatric psychiatric unit is ...

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