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Select Specialty Hospital -- Akron, LLC et al v. Kathleen Sebelius

October 25, 2011


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


Plaintiffs Select Specialty Hospital -- Akron, LLC; Select Specialty Hospital -- Columbus, Inc.; Select Specialty Hospital -- Gulf Coast, Inc.; and Select Specialty Hospital -- Wichita, Inc. (collectively, "plaintiffs") have brought this action against the Secretary of the Department of Health and Human Services ("defendant") to challenge an amendment to a Final Rule promulgated by the Centers for Medicare and Medicaid Services ("CMS"). Before the Court is plaintiffs' Motion [15] for Summary Judgment and defendant's Cross-Motion [18] for Summary Judgment. Upon consideration of both Motions, defendant's opposition [18] to plaintiffs' motion, plaintiffs' reply [23] in support of their motion and opposition to defendant's cross-motion, defendant's reply [26], the entire record in this case, and the applicable law, the Court will deny plaintiffs' Motion for Summary Judgment and grant defendant's Cross-Motion for Summary Judgment.


A.Medicare Payment, Cost Reporting, and Appeals Process

The Medicare program was established to provide health insurance to the elderly and disabled. See 42 U.S.C. §§ 1395--1395hh. The Centers for Medicare and Medicaid Services ("CMS") is the operating component of the Department of Health and Human Services ("HHS") charged with administering the Medicare program. Part A of Medicare, at issue here, "provides basic protection against the costs of hospital, related post-hospital, home health services, and hospice care" for the elderly. 42 U.S.C. § 1395c.

Hospitals participate in the Medicare program by, among other things, entering into written agreements with the Secretary of HHS to provide hospital services to eligible individuals.

42 U.S.C. § 1395cc. CMS, through a fiscal intermediary or Medicare Administrative Contractor ("Intermediary"), pays hospitals participating in the Medicare program. See 42 U.S.C. § 1395ww. A hospital's claimed costs for services furnished to Medicare beneficiaries are reviewed and subject to audit by the Intermediary acting as an agent of the Secretary. See 42 U.S.C. § 1395h. At the end of the fiscal year, the hospital must submit a cost report that indicates the appropriate portion of its operating and capital-related costs that should be allocated to Medicare. See 42 C.F.R. § 413.24. This report is then reviewed and is subject to audit by the Intermediary. See id. To preserve its appeal rights, a Medicare provider has the right to file its cost report "under protest" when it believes that it is entitled to an amount of Medicare reimbursement that the Intermediary will deny under an interpretation of regulation or policy. See 42 C.F.R. § 405.1835(a)(1)(ii); see also Bethesda Hosp. Ass'n v. Bowen, 485 U.S. 399, 408 (1988); Medicare Provider Reimbursement Manual (CMS Pub. 15-2) § 115. This requires the Medicare provider to "self-disallow" or "self-adjust" the amounts at issue.

After completion of the Intermediary's audit, the Intermediary issues a Notice of Program Reimbursement ("NPR"), which informs the hospital of the final determination of its Medicare reimbursement for the cost reporting period-including any positive or negative adjustments- pursuant to the Medicare Act and regulations. See 42 C.F.R. § 413.20. If a hospital "is dissatisfied with a final determination of the organization serving as its fiscal intermediary . . . as to the amount of total program reimbursement due the provider for the items and services furnished to individuals for which payment may be made under this title for the period covered by such report," the hospital has a right to obtain a hearing before the Provider Reimbursement Review Board ("PRRB") by filing an appeal within 180 days of receiving its NPR. 42 U.S.C. § 1395oo(a)(1)(A)(i). A group of commonly owned hospitals may appeal the same issue to the PRRB as a group appeal. The Secretary, through the Administrator of CMS ("Administrator"), may elect to reverse, affirm, or modify the PRRB's decision. See 42 U.S.C. § 1395oo(f).

Providers "have the right to obtain judicial review of any final decision of the PRRB, or of any reversal, affirmance, or modification by the Secretary, by a civil action commenced within 60 days of the date on which notice of any final decision by the PRRB or of any reversal, affirmance, or modification of the Secretary is received." 42 U.S.C. § 1395oo(f). If the Administrator declines to review the PRRB's decision, the providers are entitled to judicial review of the PRRB's decision. 42 C.F.R. § 405.1877(b)(2).

A provider may seek expedited judicial review-that is, judicial review without a hearing before the PRRB or a decision of the Administrator-if the following three requirements are satisfied: First, the provider must be eligible for a PRRB hearing, meaning that the provider meets the applicable amount-in-controversy and timeliness requirements. Second, there must be no factual issues in dispute. Third, the case must turn on an issue that the PRRB lacks authority to decide, such as an interpretation of CMS policy. See 42 C.F.R. § 405.1842.; Hunterdon/Somerset 2001 Wage Index Group v. Riverbend Gov't Benefits Adm'r, PRRB Hearing Dec. No. 2004-D13, Case No. 01-0881GE (Apr. 14, 2004).

B.Acute Care Hospital Prospective Payment System

Since 1983, under 42 U.S.C. § 1395ww(d) the Medicare program has paid for an acute care hospital's operating costs in furnishing inpatient services to Medicare beneficiaries under a prospective payment system ("Inpatient PPS" or "IPPS"), in which payment is made at a predetermined, specific rate for each discharge. See Washington Hosp. Ctr. v. Bowen, 795 F.2d 139, 142 (D.C. Cir. 1986). The average stay of all Medicare patients in a general acute care hospital is approximately six days, so the prospective payment system for general acute care hospitals is not designed to reimburse hospitals on a regular basis for long-term hospital care.

C.Long Term Care Hospitals and Hospitals within Hospitals

In contrast to acute care hospitals, in order to qualify as a long term care hospital ("LTCH") for Medicare payment purposes, a hospital must "have an average length of stay of greater than 25 days." 42 C.F.R. § 412.23(e). Medicare reimbursement to LTCHs is based on a prospective payment system ("LTCH PPS"). See 42 C.F.R. § 412.500; 42 C.F.R. § 412.1(a)(4). The LTCH PPS system uses diagnosis-related groups ("DRGs") "to classify patient discharges from a long-term care hospital based on clinical characteristics and average resource use, for prospective payment purposes . . . ." 42 C.F.R. § 412.503.

LTCHs may operate as hospitals within hospitals ("HwHs"), which are defined as hospitals that occupy space in a building also used by another hospital, or in one or more separate buildings located on the same campus as buildings used by another hospital. 42 C.F.R. § 412.22(e). LTCHs may also operate satellite facilities, which are defined as a part of a hospital that provides inpatient services in a building also used by another hospital, or in one or more entire buildings located on the same campus as buildings used by another hospital. See id. § 412.22(h). A general acute care hospital located in the same building or on the same campus as an LTCH is often referred to as the "host" or "co-located" hospital. See id. § 412.22(e).

The co-location of an HwH and its host hospital creates the possibility of inappropriate financial incentives, so CMS requires that an HwH be organizationally and financially independent from its host, as the HwH is not a unit of the host hospital. See id. In addition, CMS imposes certain payment limitations on HwHs intended to "diminish the possibility of [an HwH] actually functioning as a unit of an acute care hospital and at the same time generating unwarranted payments" under the more lucrative LTCH PPS system, a situation precluded by statute. 69 Fed. Reg. 48916, 49194 (Aug. 11, 2004); see also 42 U.S.C. § 1395ww(d)(1)(B); 69 Fed. Reg. at 49191.

D.May 2004 Proposed Rule and the 25 Percent Policy

Until 2004, CMS had required that HwHs meet at least one of three criteria regarding the performance of basic hospital functions in order to be excluded from IPPS. See 42 C.F.R. § 412.22(e)(5) (2004). One of the three criteria directed that at least 75 percent of the admissions to an HwH be referred from a source other than the host hospital. Id. at § 412.22(e)(5)(iii). CMS subsequently determined that hospitals were almost never electing to meet the 75 percent requirement of section 412.22(e)(5)(iii), choosing instead to meet one of two other criteria in the regulation. See 69 Fed. Reg. at 49192. In doing so, CMS perceived that entities were using "complex arrangements" to subvert the policy intent of the criteria they used, thereby enabling the use of an HwH as simply another unit of its co-located hospital while simultaneously obtaining Medicare reimbursement under the LTCH PPS system as if the HwH functioned independently. Id. at 49193.

Therefore, on May 18, 2004 CMS issued a notice of proposed rulemaking, explaining that it had identified a problem with respect to "incentives to prematurely discharge patients to a postacute care setting in spite of the fact that the acute care hospital could continue to provide the appropriate level of care" and that there existed "significant inducements for patients to be moved to the provider setting that generates the highest Medicare ...

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