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Cape Cod Hospital v. Sebelius

December 21, 2009


The opinion of the court was delivered by: Royce C. Lamberth


Plaintiffs Cape Cod Hospital, Falmouth Hospital Association, Flushing Medical Center, Brookdale University Hospital Medical Center and Jamaica Hospital Center bring this action pursuant to the Administrative Procedure Act (APA), 5 U.S.C. § 702 et al., seeking judicial review of two final rules promulgated by the U.S. Department of Health and Human Services. The rules in dispute determined the rates for inpatient hospital services paid under the Medicare prospective payment system. The first motion presently before the Court concerns two documents offered by the plaintiffs that were not included in the official administrative record for Fiscal Year 2007. The defendant moves to strike these documents as improperly supplementing the administrative record. In addition, both parties have filed motions for summary judgment. For reasons set forth in this opinion, the motion to strike is GRANTED in part and DENIED in part. Defendant's cross-motion for summary judgment is GRANTED. Accordingly, Plaintiff's motion for summary judgment is DENIED.


A.Medicare Payment for Inpatient Hospital Services

Established in 1965 under Title XVIII of the Social Security Act, 79 Stat. 291, as amended, 42 U.S.C. § 1395 et seq. (1988 ed. and Supp. IV), Medicare is a federally funded health insurance program for the elderly and disabled. Subject to a few exceptions, Congress authorized the Secretary of Health and Human Services (Secretary) to issue regulations defining reimbursable costs and otherwise giving content to the broad outlines of the Medicare statute. § 1395x(v)(1)(A). That authority encompasses the discretion to determine both the "reasonable cost" of services and the "items to be included" in the category of reimbursable services. Thomas Jefferson University v. Shalala, 512 U.S. 504, 507 (1994). However, experience proved that the "reasonable cost" system provided "little incentive for hospitals to keep costs down" because "[t]he more they spent, the more they were reimbursed." Tuscon Med. Ctr. v. Sullivan, 947 F.2d 971, 974 (D.C. Cir. 1991). In the Balanced Budget Act of 1997, Congress changed the payment system for services from a "reasonable cost" to a prospective payment system (PPS). Under PPS, Medicare pays prospectively-established rates for each patient discharge. 42 U.S.C. § 1395ww(d); 71 Fed. Reg. 47870, 47875-76 (Aug. 16, 2006). Plaintiffs are five non-profit hospitals that participate in the Medicare program.

Under the Medicare Act, the amount of reimbursement to a provider hospital for a given service is dependant on the hospital's "average standardized amount" per discharge and the "area wage index" applicable to the hospital. See 42 U.S.C. § 1395ww(d)(2)(C),(D); § 1395ww(d)(3)(E). The standardized amount is the base payment rate per discharge under the PPS according to the particular diagnosis.*fn2 42 U.S.C. § 1395ww(d)(3). It is divided into two parts: a labor-related share and a nonlabor-related share. See 42 U.S.C. § 1395ww(d)(3)(E). The Secretary adjusts the labor-related portion of the standardized amount for differences in hospital wage levels in different geographic areas.*fn3 See 42 U.S.C. § 1395ww(d)(3)(E). In order to calculate the relative wage-level adjustment, the Secretary calculates and assigns an area wage index value to each hospital reflecting the relative wage levels in the hospital's geographic location. See 71 Fed. Reg. at 48005; 71 Fed. Reg. 59886, 59903-68 (Oct. 11, 2006). Beginning in 1994, Congress required that the Department of Health and Human Services, through the Centers for Medicare and Medicaid Services (CMS), update wage indexes annually based on wage data information submitted by participating hospitals.

B.The Rural Floor Adjustment

The disparity in payments between urban and rural hospitals caused by differences in the applicable wage indexes has resulted in congressional adjustments. In 1997, Congress enacted legislation requiring the wage index for hospitals located in an urban area to not be less that the wage index for hospitals located in rural areas in the same state. Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4410(a) (BBA), 42 U.S.C. § 1395ww note. The legislation provided that "the area wage index applicable . . . to any hospital which is not located in a rural area . . . may not be less than the area wage index applicable . . . to hospitals located in rural areas in the State in which the hospital is located." Id. In other words, where a state's rural hospitals would otherwise have a higher applicable wage index than an urban hospital in the same state, Congress provided that the urban hospital's wage index be raised to match that of the rural hospitals. This adjustment, commonly called the "rural floor," is required to be performed in a budget neutral manner, so that payments in a given fiscal year "are not greater or less than those which would have been made in [that] year" had the rural floor provision not applied. Id. The effect of the rural floor is to provide payments to some urban hospitals that are greater than would have otherwise been provided to those hospitals. The budget neutrality provision means that any increases in the wage indexes for urban hospitals due to the rural floor must be offset by a corresponding reduction to the wage indexes for rural hospitals so that the total Medicare payments are no greater and no less than they would have been had the rural floor not existed.

Each year, the Secretary publishes proposed changes in the PPS policies and calculations for the upcoming fiscal year in the Federal Register. The Secretary's final changes are published "after such consideration of public comment . . . as is feasible in the time available." 42 U.S.C. § 1395ww(e)(5). The CMS's standard procedure is to issue a Proposed Rule that identifies any changes that it proposes to make along with an Addendum to the Proposed Rule that describes the changes. The agency also provides information on "how to obtain data related to the PPS changes and provides the raw wage data to be used for calculations in the current year, as well as hospital wage indexes, and a PPS payment impact file that contains payment adjustment variables that CMS uses when estimating . . . payments." Cross-Mot., Summ. J. (citing R08:148-50; R07:143-45).

C.Fiscal Year 2007 Rulemaking Process

CMS issued a proposed rule for FY 2007 on April 25, 2006. The proposed rule set forth specific instructions for submission of comments to those who wished to deliver comments by hand to CMS's Baltimore address. R07:2. The FY 2007 proposed rule directs those who wish to submit comments by hand delivery to the Baltimore office to call staff in advance to schedule their arrival with one of the CMS's regulations staff members so that proper receipt of comments can be assured. Specifically, the proposed rule instructed:

By hand or courier. If you prefer, you may deliver (by hand or courier) your written comments (one original and two copies) before the close of the comment period to one of the following addresses. If you intend to deliver your comments to the Baltimore address, please call telephone number (410) 786--7195 in advance to schedule your arrival with one of our staff members. Room 445--G, Hubert H. Humphrey Building, 200 Independence Avenue, SW., Washington, DC 20201, or 7500 Security Boulevard, Baltimore, MD 21244--1850. (Because access to the interior of the Hubert H. Humphrey Building is not readily available to persons without Federal Government identification, commenters are encouraged to leave their comments in the CMS drop slots located in the main lobby of the building. A stamp-in clock is available for persons wishing to retain proof of filing by stamping in and retaining an extra copy of the comments being filed.)

R07:2. According to the FY 2007 rulemaking record submitted by the Secretary, no comments addressing the rural floor adjustment were properly submitted during the FY 2007 comment period.

However, plaintiffs contend there are two additional items that should have been included in the FY 2007 rulemaking record and were left out. The first is an e-mail exchange between the plaintiffs' consultant, Theodore Giovanis, and a CMS employee, Nora Fleming, in which Giovanis asked questions regarding the calculation of rural floor budget neutrality for the acute care prospective payment system in May 2006. The employee responded to the inquiry with a description of how CMS calculates the wage and budget neutrality factor and Giovanis responded by raising a question about the neutrality floor and later requesting a formula that is used in the calculation.

The second document that the plaintiffs submitted in the partial administrative record that is not included in the administrative record certified by the defendant is a comment letter dated June 9, 2006, which was submitted by the plaintiff's same consultant. While the letter has an acknowledgement of receipt by a CMS employee, the defendants did not include the letter as part of the administrative record for FY 2007.

The FY 2007 Final Rule did not adopt any changes to the rural floor adjustment methodology. R07:1225 (71 Fed. Reg. 47870). It also did not address Giovanis' observations about the rural floor adjustment. Instead, it stated that it used the "same method" to calculate the rural floor budget neutrality adjustment that it used in prior years. 71 Fed. Reg. at 48147. The same method described by CMS referred to the simulation model that had been used from 1998 to 2007. The model was used to determine each year's budget neutrality adjustment to the standardized amount for the effect of the rural floor. The model compared the projected aggregate payments resulting from the next year's wage indexes with the aggregate payments resulting from applying the prior year's wage indexes. In the Final Rule for 2007, CMS described the model as follows:

[W]e used FY 2005 discharge data to simulate payments and compared aggregate payments using the FY 2006 relative weights and wage indexes to aggregate payments using the FY 2007 relative weights and wage indexes. The same methodology was used for the FY 2006 budget neutrality adjustment. . . . These budget neutrality adjustment factors are applied to the standardized amounts without removing the effects of the FY 2006 budget neutrality adjustments.

71 Fed. Reg. at 48147. Previous years had similar descriptions of the simulation model. See, e.g., 70 Fed. Reg. at 47493; 69 Fed. Reg. at 49275; 68 Fed. Reg. at 45475-76. However, additional data was not provided in the calculation of the budget neutrality adjustments.*fn4

D.Fiscal Year 2008 Rulemaking Process

CMS issued a proposed rule for FY 2008 on May 3, 2007. After the 2007 final rule had been issued, CMS reevaluated the rural floor adjustment methodology and the e-mail exchange which occurred during the FY 2007 period was included in the FY 2008 administrative record. Under the new proposed methodology, CMS would apply the budget neutrality adjustment factor to the wage index rather than to the standardized amount as it had done in the past. R08:109-14.

CMS stated that "the statute supports either an adjustment to the standardized amount or the wage indices because under either methodology, the rural floor would not result in aggregate payments that were greater or less than those that would have been made in the absence of a rural floor." R08:114. However, CMS noted that new adjustment to the "wage index would have slightly different effects from an adjustment to the standardized amount." R08:114. In connection with the change in the calculation of the rural floor adjustment, CMS also proposed a one-time change adjustment to standardize the amount, in effect neutralizing the 2007 rural floor adjustment. R08:161.

After the proposed rule was published, the plaintiffs submitted a request for additional information, including information about the proposed methodology, the proposed one-time adjustment and details about how the rural floor budget neutrality had been calculated in prior years. R08:699-705. CMS declined to provide additional information in a letter dated June 1, 2007, stating its belief that it had provided "more than sufficient explanation." Plaintiffs then submitted comments on the proposed rule. R08:691-98. Specifically, plaintiffs (1) requested that CMS fully explain the basis and purpose for the proposed change and disclose known errors in the calculation of rural floor adjustment for prior years; (2) informed CMS that the proposed change in method was neither necessary nor sufficient to fix the data problem with CMS's past calculations of the budget neutrality adjustment, and it may create other problems; and (3) requested that CMS correct the effects of known errors in the calculations for prior years and pay hospitals the additional sums due for cost reporting periods that are still subject to correction.

In August 2007, the Secretary published the final rule for 2008 and adopted the new methodology the agency had proposed. 72 Fed. Reg. 47130. While CMS acknowledged that additional information was requested, it did not provide the additional information in the final rule. CMS also noted a comment that the calculation of the rural floor budget neutrality adjustment for prior years was flawed because it created an "inappropriate duplicating effect" that was "permanently built into the standardized amount." 72 Fed. Reg. at 47330. However, the agency responded that such alleged errors were beyond the scope of the final rule for 2008. Specifically, the agency stated that "[e]ven if errors were made in prior fiscal years, we would not make an adjustment to make up for those errors when setting rates for FY 2008." Id.

The one-time adjustment was also adopted in the final rule for 2008. In the appendix to the rule, CMS stated that the one-time adjustment was meant to "remove[] the effect of the budget neutrality adjustment applied in FY 2007 to the standardized amount for application of the rural floor. 72 Fed. Reg. at 47421. CMS did not explain why it only accounted for the previous year or the details of how the adjustment was calculated.

E.PRRB Appeal

Plaintiffs brought challenges to both the FY 2007 and 2008 Final Rules before the Provider Reimbursement Review Board (PRRB), the administrative body within HHS responsible for hearing provider payment claims pursuant to 42 U.S.C. ยง1395oo(a). All five hospitals appealed the final determination of the payment rates for 2007 but only two hospitals appealed the final payment rule for 2008. After the ...

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