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University of Texas M.D. Anderson Cancer Center v. Sebelius

April 19, 2010


The opinion of the court was delivered by: Richard D. Bennett United States District Judge


Plaintiff, the University of Texas M.D. Anderson Cancer Center (the "Hospital"), a leading center for cancer treatment and research, has filed this action against Kathleen Sebelius in her official capacity as Secretary of the United States Department of Health and Human Services (the "Secretary"). The Hospital maintains that the Secretary did not properly interpret and administer provisions of the Medicare program, and that, as a result, the Hospital did not receive sufficient reimbursement for the outpatient and inpatient costs it incurred in its fiscal years ending August 31, 2000 and August 31, 2001. More specifically, the Hospital claims that the Secretary improperly determined "reasonable cost" in calculating outpatient reimbursement and failed to properly adjust the target amount limits that cap inpatient reimbursement. Currently pending are the parties' cross-motions for summary judgment. The parties' submissions have been reviewed and a hearing was conducted on December 10, 2009. For the reasons explicated below, this Court holds that the Secretary's interpretations of the applicable statute and regulations were authorized and not arbitrary and capricious. Accordingly, Plaintiff's Motion for Summary Judgment (Paper No. 14) is DENIED and Defendant's Cross-Motion for Summary Judgment (Paper No. 16) is GRANTED.


A. The Medicare Program and Appeals Process

The Medicare program, a federally funded health insurance program for the aged and disabled, is set forth in Title XVIII of the Social Security Act, commonly referred to as the Medicare Act (the "Act"). 42 U.S.C. §§ 1395 et seq. Part A of the Act authorizes payment for inpatient hospital services, 42 U.S.C. § 1395d(a)(1), and Part B of the Act provides for payment of certain outpatient services. 42 U.S.C. § 1395k(a)(2)(B). The Centers for Medicare and Medicaid Services ("CMS"), a component agency of the Department of Health and Human Services, administers the Medicare program.

Under the Medicare program, hospitals and other "providers of services" enter into contracts with the Secretary and interact with certain private insurance companies, or "fiscal intermediaries." These fiscal intermediaries serve as agents of the Secretary and administer the program by performing audit and payment services. See 42 U.S.C. § 1395h. At the end of each fiscal year, a provider must submit to its intermediary a report listing all costs for which the provider seeks reimbursement. 42 C.F.R. § 405.1801(b). The intermediary reviews the cost report and then issues a Notice of Program Reimbursement ("NPR"), which announces the intermediary's final determination on the amount of reimbursement owed to the provider. 42 C.F.R. § 405.1803.

A hospital may appeal an intermediary's final determination to the Provider Reimbursement Review Board ("PRRB" or "Board"), an administrative tribunal appointed by the Secretary. 42 U.S.C. § 1395oo(a), (b). The Board may hold a hearing and issue a decision that is potentially subject to further review by the Secretary's delegate, the Administrator of CMS. 42 U.S.C. § 1395oo(f)(1); 42 C.F.R. § 405.1875. Lastly, any final agency decision, whether rendered by the Board or the CMS Administrator, is subject to judicial review in a federal district court. 42 U.S.C. § 1395oo(f)(1).

B. The Transition from Reasonable Cost Reimbursement to the Prospective Payment System of Reimbursement

In its original form, the Medicare statute authorized reimbursement of a hospital's "reasonable costs" in treating Medicare beneficiaries, which was normally equivalent to the costs incurred by the hospital that were deemed "allowable" under the Secretary's regulations. See 42 U.S.C. § 1395f(b)(1). However, because the reasonable costs system of reimbursement was considered to be too costly, Congress amended the Act on several occasions to implement measures aimed at incentivizing cost-savings. See St. Barnabas Hosp. v. Thompson, 139 F. Supp. 2d 540, 542 (S.D.N.Y. 2001). Many of these amendments served to transform the system of medical provider reimbursement from a "reasonable cost" basis, to a prospective payment system ("PPS"), which was designed to reduce costs and increase efficiency.

The Hospital's challenges in this case relate to two separate regulatory schemes that utilize the PPS methodology, one involving reimbursement for outpatient services and the other involving reimbursement for inpatient services. Both of these schemes specifically exempt major cancer treatment and research centers, such as the Plaintiff Hospital, from the normal PPS regime. The statutory provisions allow exempted providers to receive reimbursement for a portion of their current reasonable costs for outpatient services and to be reimbursed for their reasonable costs for inpatient services, subject to certain rate-of-increase limits.

The Hospital's separate challenges relating to outpatient and inpatient reimbursement, and the pertinent statutory contexts, are addressed in turn.


As a general rule, summary judgment should be granted under Federal Rule of Civil Procedure 56 when the pleadings and evidence show that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). However, in cases involving review of a final agency action under the Administrative Procedure Act, 5 U.S.C. § 706, the standard established in Rule 56(c) is inapplicable because the Court's role is limited to reviewing the administrative record. See John L. Doyne Hospital v. Johnson, 603 F. Supp. 2d 172, 178 (D.D.C. 2009); see also 42 U.S.C. § 1395oo(f)(1) (stating that judicial review of reimbursement decisions under the Medicare Act shall be made under APA standards).

Under the APA, the Administrator's decision can be set aside only if it was "arbitrary, capricious, an abuse of discretion, otherwise not in accordance with the law," or "unsupported by substantial evidence... reviewed on the record of an agency hearing provided by statute." 5 U.S.C. § 706. The arbitrary and capricious standard requires a reviewing court to consider whether 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, 103 S.Ct. 2856, 77 L.Ed. 2d 443 (1983). Accordingly, a court must determine "whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment." Id. (internal quotations omitted). The arbitrary and capricious standard is "highly deferential and presumes the validity of agency action." United Mine Workers v. Dole, 276 U.S. App. D.C. 248, 870 F.2d 662, 666 (D.C. Cir. 1989) (internal quotation omitted). A court's scope of review "is narrow and a court is not to substitute its judgment for that of the agency." Motor Vehicle Mfrs. Assoc., 463 U.S. at 43. Thus, a reviewing court "must affirm if a rational basis for the agency's decision exists." Bolden v. Blue Cross & Blue Shield Assoc., 270 U.S. App. D.C. 144, 848 F.2d 201, 205 (D.C. Cir. 1988).

In determining whether an agency's decision is supported by substantial evidence, courts are "highly deferential to the agency fact-finder, requiring only 'such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.'" Rossello ex rel. Rossello v. Astrue, 381 U.S. App. D.C. 477, 529 F.3d 1181, 1185 (D.C. Cir. 2008) (quoting Pierce v. Underwood, 487 U.S. 552, 565, 108 S.Ct. 2541, 101 L.Ed. 2d 490 (1988)). An agency decision "may be supported by substantial evidence even though a plausible alternative interpretation of the evidence would support a contrary view." Robinson v. Nat'l Transp. Safety Bd., 307 U.S. App. D.C. 343, 28 F.3d 210, 215 (D.C. Cir. 1994) (internal quotations omitted).

Courts review an agency's interpretation of a statute that the agency is charged with administering under the two-step analysis set forth in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed. 2d 694 (1984). Under the Chevron framework, courts first determine whether Congress has directly addressed the "precise question at issue," and if it has, "the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Id. at 842-43. However, if the statute is silent or ambiguous with respect to the specific issue, the court then must assess "whether the agency's answer is based on a permissible construction of the statute." Id. at 843. With regard to this second step, an agency's interpretation of a statute "need not be the best or most natural one by grammatical or other standards... Rather [it] need be only reasonable to warrant deference."

Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 702, 111 S.Ct. 2524, 115 L.Ed. 2d 604 (1991) (citations omitted); see also Bridgestone/Firestone, Inc. v. Pension Ben. Guaranty Corp., 282 U.S. App. D.C. 89, 892 F.2d 105, 110 (D.C. Cir. 1989) ("[a]s long as the agency's [construction of the statute is] consistent with the language and purpose of the statute, [the Court] must defer to the agency's interpretation").

Similarly, courts must afford "substantial deference to an agency's interpretation of its own regulations." Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 512, 114 S.Ct. 2381, 129 L.Ed. 2d 405 (1994). The task of reviewing courts "is not to decide which among several competing interpretations best serves the regulatory purpose. Rather, the agency's interpretation must be given controlling weight unless it is plainly erroneous or inconsistent with the regulation." Id. at 512 (internal quotation marks and citations omitted). "This broad deference is all the more warranted when, as here, the regulation concerns 'a complex and highly technical regulatory program.'" Id. (quoting Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 697, 115 L.Ed. 2d 604, 111 S.Ct. 2524 (1991)); see also Methodist Hosp. of Sacramento v. Shalala, 309 U.S. App. D.C. 37, 38 F.3d 1225, 1229 (D.C. Cir. 1994) (noting that the "tremendous complexity" of the Medicare program justifies the application of a heightened deference).


I. Outpatient Reimbursement

A. Statutory Background for Reimbursement of Outpatient Costs

Payment for hospital outpatient services is set forth in section 1833 of the Act. See 42 U.S.C. §§ 1395(a)(2)(B), 1395l(t). As mentioned above, this section originally authorized payment for the "reasonable costs" of a hospital's services. The definition of "reasonable cost" is explicated in subsection 1861(v) of the Act. 42 U.S.C. § 1395x(v).

In an effort to control escalating Medicare costs, Congress has periodically implemented new reimbursement limitations for outpatient services. In 1972 Congress amended section 1833 to limit payment to the lesser of reasonable costs or charges. See Social Security Amendments of 1972, Pub. L. No. 92-603 § 233(b), reprinted in 1972 U.S.C.A.A.N. 1548, 1649-50; see also 42 U.S.C. §§ 1395l(a)(2)(B), 1395x(v). In 1990, Congress directed that outpatient reasonable cost payments be calculated by applying two reductions to reasonable costs: a 10 percent reduction for capital-related costs and a 5.8 percent reduction for non-capital related costs. See Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508, § 4151(b)(1), 104 Stat. 1388, 1388-72 (1990), codified as amended at 42 U.S.C. § 1395x(v)(1)(S)(ii). These reductions were designed to be in effect from 1991 until outpatient PPS was implemented, or until 1999, whichever was later. 42 U.S.C. § 1395x(v)(1)(ii)(II).

In 1997, Congress again amended section 1833 of the Act, and directed the Secretary to implement a prospective payment system ("PPS") for outpatient hospital services, to be effective on January 1, 1999. See Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4523(a), 111 Stat. 251 (1997); 42 U.S.C. § 1395l(t). The terms of the 1997 Act were modified by Congress in 1999 in order to ease the burdens for transitioning to outpatient PPS. See Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, Pub. L. 106-113, 113 Stat. 1501 (1999) ("BBRA"). Under the 1999 modification, Congress created a "transitional corridor," under which the transitional payments were extended until 2003. 65 Fed. Reg. 67798, 67814 (Nov. 13, 2000).

Nevertheless, while most providers had to transition to the PPS regime for reimbursement of their services, Congress exempted cancer hospitals from outpatient PPS. See BBRA, at § 202(a)(3); 42 U.S.C. § 1395l(t)(7). Towards this end, Congress inserted a permanent "hold harmless" provision in subsection 1833(t) of the Act, which permitted cancer hospitals to receive payment for at least a portion of their current "reasonable costs" incurred through treatment of Medicare outpatients. See 42 U.S.C. § 1395l(t)(7); 42 C.F.R. § 419.70(d)(2), (e)-(f) (2001). Specifically, the hold harmless provision states that cancer hospitals shall receive payment for the greater of: (i) the amount that normally would be paid under the hospital's outpatient PPS fee schedule; or (ii) the product of the hospital's reasonable cost of services furnished in the current year multiplied by the hospital's payment-to-cost ratio. See 42 U.S.C. § 1395l(t)(7)(D)-(F). The statute defines the payment-to-cost figure as the ratio of Medicare payment to the hospital in the 1996 base year divided by the "reasonable cost" incurred for hospital outpatient services furnished by the hospital in the 1996 base year. See 42 U.S.C. § 1395l(t)(7)(F)(ii)(I). The determination of current year payment under the hold harmless provision is illustrated by the following formula: Current Year Payment = Current Year Reasonable Costs X 1996 Medicare Payments 1996 Reasonable Costs

B. The Hospital's Challenge to its Reimbursement for Outpatient Services

The Plaintiff, the University of Texas M.D. Anderson Cancer Center (the "Hospital"), is a cancer treatment and research center and is therefore subject to the permanent hold-harmless provision under the prospective payment system for reimbursement of outpatient hospital services. 42 U.S.C. § 1395l(t). A.R. at 117 (Stipulation ¶ 3.1.) The PPS regime became effective on August ...

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