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Genesis Health Ventures, Inc v. Kathleen Sebelius

July 22, 2011


The opinion of the court was delivered by: Ellen Segal Huvelle United States District Judge


Plaintiff Genesis Health Ventures, Inc. ("Genesis"), on behalf of thirty (30) skilled nursing facilities it either owns or manages ("Providers"), brings this action against defendant Kathleen Sebelius, Secretary of Health and Human Services ("Secretary"), to reverse a final decision of the Provider Reimbursement Review Board ("Board") as to Providers' Medicare reimbursements for fiscal year 1996. The Board's decision affirmed the fiscal intermediary's decision to disallow Providers' allocation of nursing administration costs based on both nursing and therapy salaries, as opposed to only nursing salaries, thereby reducing Providers' aggregate Medicare reimbursements by $390,685.00. Plaintiff challenges the Board's decision under the Administrative Procedures Act ("APA"), 5 U.S.C. §§ 701-706, as arbitrary and capricious and not supported by substantial evidence. In the alternative, plaintiff contends that the Secretary is equitably estopped from rejecting its method for allocating nursing administration costs. Before the Court are the parties' cross-motions for summary judgment. As explained herein, the Court will grant defendant's motion and deny plaintiff's motion.



A. The Medicare Act

Title XVIII of the Social Security Act, commonly known as the Medicare Act, establishes a federal program of health insurance for the elderly and disabled. 42 U.S.C. § 1395 et seq.; Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 506 (1994). Part A of Medicare provides "Hospital Insurance Benefits." 42 U.S.C. § 1395c. It authorizes payments to "providers of services," 42 U.S.C. § 1395g, including skilled nursing facilities such as Providers, 42 U.S.C. §§ 1395x(u), for their "reasonable costs" of furnishing "covered services." 42 U.S.C. §§ 1395c, 1395d, 1395f(b), 1395g(a), 1395i, 1395x(v)(1)(A). The "reasonable cost" of a service is "the cost actually incurred, excluding therefrom any part of incurred cost found to be unnecessary in the efficient delivery of needed health services." 42 U.S.C. § 1395x(v)(1)(A). The Secretary, through the Centers for Medicare and Medicaid Services ("CMS"), administers the Medicare statute and is responsible for issuing regulations further defining reasonable costs and for determining reimbursement amounts. Thomas Jefferson Univ., 512 U.S. at 506--07 (citing 42 U.S.C. § 1395x(v)(1)(A) (reasonable costs "shall be determined in accordance with regulations establishing the method or methods to be used, and the items to be included, in determining such costs for various types or classes of institutions, agencies, and services")). Such implementing regulations must "(i) take into account both direct and indirect costs of providers of services . . . in order that, under the methods of determining costs, the necessary costs of efficiently delivering covered services to individuals covered by the insurance programs established by this subchapter will not be borne by individuals not so covered, and the costs with respect to individuals not so covered will not be borne by such insurance programs, and (ii) provide for the making of suitable retroactive corrective adjustments where, for a provider of services for any fiscal period, the aggregate reimbursement produced by the methods of determining costs proves to be either inadequate or excessive." 42 U.S.C. § 1395x(v)(1)(A).

B. Determining "Reasonable Costs"

As directed by the Medicare Act, the Secretary has adopted implementing regulations which further define the term "reasonable cost," 42 C.F.R. §§ 413.1(a)(1)(i)(C), 413.9(b)*fn1 In addition, the Secretary has issued a Provider Reimbursement Manual, which contains "guidelines and policies to implement Medicare regulations which set forth principles for determining the reasonable cost of provider services." Centers for Medicare and Medicaid

Services, Provider Reimbursement Manual, pt. 1 ("Reimbursement Manual"), Foreword, at I.*fn2 The Reimbursement Manual's interpretive rules "do not have the force and effect of a statute or regulation," but do bind fiscal intermediaries. Id.; see Catholic Health Initiatives v. Sebelius, 617 F.3d 490, 491 (D.C. Cir. 2010) (citing 42 U.S.C. § 1395h).

1. Cost Finding

For fiscal year 1996, skilled nursing facilities such as Providers obtained reimbursement for their "reasonable costs" by submitting a "cost report"*fn3 to a "fiscal intermediary," an entity contracted by the Secretary to coordinate billing by and payments to providers. 42 U.S.C. § 1395h (2003) (repealed by Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ("2003 Medicare Act"), § 911, Pub. L. No. 108-173, 117 Stat. 2066)*fn4 ; 42 U.S.C. § 1395x(v)(1)(A); 42 C.F.R. § 413.1; 42 C.F.R. § 413.20. Through a complex process known as "cost-finding," a provider is able to recover both the direct and indirect costs of treating Medicare beneficiaries.*fn5 See Reimbursement Manual § 2306. "Cost-finding" starts from the premise that "[d]epartments within a provider are usually divided into two types:" (1) departments "that produce patient care revenue (e.g., routine services, radiology)," referred to in a cost report as a "revenue-producing cost center," and (2) departments "that do not directly generate patient care revenue but are utilized as a service by other departments (e.g., laundry and linen, dietary)," referred to in a cost report as a "non-revenue producing cost center." Reimbursement Manual, pt. 1, § 2306. "Cost-finding" recognizes that:

Although non-revenue-producing cost centers do not directly produce patient care revenue, they contribute indirectly to patient care revenue generated by "serving" as a service to the revenue-producing centers and also to other non-revenue-producing centers. Therefore, for the purpose of proper matching of revenue and expenses, the cost of the revenue-producing centers includes both its direct expenses and its proportionate share of the costs of each non-revenue-producing center (indirect costs) based on the amount of services received.

Id. Nursing administration constitutes another "non-revenue-producing cost center."

2. Step-Down Method of Cost-Finding

The method of "cost-finding" used by Providers is known as the "step-down method."

42 C.F.R. § 413.24.*fn6 Using this method, a provider's first step is to assign all costs to "cost centers."*fn7 The next step is to allocate each of the "general service cost centers,"*fn8 one of which isthe "nursing administration" cost center,*fn9 to the other cost centers that receive those services.*fn10 Reimbursement Manual, pt. 2, § 3524. In order to "equitably allocate the expenses of the general service cost centers," there is a "recommended basis of allocation," also known as the "statistical base."*fn11 Id. For example, the recommended basis for allocating the "capital-related costs" cost center is "square feet," the recommended basis for allocating the "employee benefits" cost center is "gross salaries," and the recommended basis for allocating the "nursing administration" cost center is "direct nursing hours." (Administrative Record ["AR"] 36); Worksheet B-1.

The "statistical base" determines where the costs for a general service cost center are allocated. After allocating all the allowable costs to the appropriate cost centers,*fn12 the provider apportions them between Medicare and non-Medicare patients so that the program reimburses the provider for only those costs ...

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