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Kaiser Foundation Hospitals Dba Kaiser Foundation Hospital v. Kathleen Sebelius

December 12, 2011

KAISER FOUNDATION HOSPITALS DBA KAISER FOUNDATION HOSPITAL - ANAHEIM, ET AL.,
PLAINTIFFS,
v.
KATHLEEN SEBELIUS, SECRETARY OF THE UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES,
DEFENDANT.



MEMORANDUM OPINION

Plaintiffs are several hospitals, all owned and operated by Kaiser Foundation Hospitals, that receive Medicare payments for the costs associated with training intern and resident physicians. The amount of reimbursement each hospital receives depends in part on the number of "full-time equivalent" residents and interns (FTEs) in its training program during a fiscal year. In 1997, Congress limited the number of FTEs a hospital could claim in future years to the FTEs counted in its latest pre-1997 cost report. Plaintiffs and the fiscal intermediary that administers Medicare reimbursements agree that the FTE counts in Plaintiffs' 1996 reports undercount the interns and residents who participated in their teaching programs that fiscal year. Such an error in those base-year figures results in inaccurate FTE caps and, hence, lost reimbursement every subsequent year for Plaintiffs. In light of this, they sought to correct these incorrect FTE caps. The intermediary, and later the Administrator of the Centers for Medicare and Medicaid Services (CMS), denied their requests on the ground that the reports that had established the caps had been finalized for more than three years and thus were no longer subject to "reopening" according to an agency limitation period.

Plaintiffs filed this suit challenging the Administrator's decision and have now moved for summary judgment. While they acknowledge that the reports establishing the FTE caps are "closed," they are not seeking reimbursement for such closed years. As they desire only to correct an erroneous factual predicate that affects subsequent "open" years, they argue this does not constitute an improper reopening. The Secretary disagrees and has filed a Cross-Motion for Summary Judgment. Because the Administrator's interpretation of the reopening regulation is inconsistent with the regulatory text, applicable case law, and the Secretary's own prior interpretations, the Court believes Plaintiffs have the better of this argument.

I.Background

A. The Medicare Statutory and Regulatory Framework

The Medicare program, established under Title XVIII of the Social Security Act and administered through CMS, provides federally funded health insurance to eligible aged or disabled persons. See generally 42 U.S.C. § 1395 et seq. Under the program, the Department of Health and Human Services "reimburses medical providers for services they supply to eligible patients." Northeast Hosp. Corp. v. Sebelius, 657 F.3d 1, 2 (D.C. Cir. 2011); see generally 42 U.S.C. § 1395 et seq. In order to be reimbursed, hospitals must submit an annual cost report detailing the expenses they incurred during the past fiscal year. See 42 C.F.R. §§ 413.20, 413.24. The Secretary has contracted with fiscal intermediaries to audit cost reports, determine how much Medicare owes each provider, and issue interim payments. See 42 U.S.C. § 1395h; 42 C.F.R. § 405.1803.

Among other things, Medicare reimburses approved teaching hospitals for the direct costs of graduate medical education (GME) -- e.g., salaries and benefits for residents and interns. See 42 C.F.R. § 413.75. The amount of GME reimbursement is based in part on the number of FTEs in the hospital's training program. See 42 U.S.C. § 1395ww(d)(5)(B)(ii); 42 C.F.R. § 413.79(d). In 1997, Congress imposed a cap on the number of FTEs a hospital may include for purposes of calculating future GME payment, which is known as the "GME FTE cap." See 42 U.S.C. 1395ww(h)(4)(F); 42 C.F.R. § 413.79(c)(2)(i). Specifically, for cost-report periods beginning on or after October 1, 1997, the hospital's unweighted FTE count -- meaning the actual number of FTEs before applying statutorily specified weighting factors -- "may not exceed the number . of such full-time equivalent residents for the hospital's most recent cost reporting period ending on or before December 31, 1996." 42 U.S.C. 1395ww(h)(4)(F). In other words, the FTE count a hospital included in its latest pre-1997 report would determine its cap (and thereby affect its reimbursement) for the indefinite future.

Hospitals' pre-1997 reports included only a weighted FTE count. See 62 Fed. Reg. 46,004(V)(I)(2)(a). Because the FTE cap is calculated based on the unweighted count, and additional data needed to be collected to calculate that figure, the caps were not established until the providers' first cost report for the period beginning on or after October 1, 1997 -- which for Plaintiffs' was filed in 1998. Id. at 46,004, 46,005; see also 42 C.F.R. § 413.79. "FTE count," therefore, refers to the weighted figure provided in the hospitals' pre-1997 cost reports, and "FTE cap" refers to the cap established thereafter based on the unweighted FTE count.

Once the GME FTE cap is established, the intermediary takes it into account when reviewing a hospital's cost reports. See 42 C.F.R. § 413.79. After such review, the intermediary issues a "notice of program reimbursement" (NPR) indicating how much Medicare owes the hospital for the fiscal year covered by the report. See 42 C.F.R. § 405.1803. The hospital has 180 days from receipt of the NPR to request a review by the Provider Reimbursement Review Board (PRRB). See 42 U.S.C. § 1395oo(a). If the hospital does not timely appeal the NPR, the cost report is considered final. See 42 C.F.R. § 405.1807(c).

The reimbursement determination may nevertheless be reopened -- upon a provider's request or at the intermediary's own initiative -- within three years of the date of the NPR. See

42 C.F.R. 405.1885(a)-(b) (2001); see also Your Home Visiting Nurse Servs., Inc. v. Shalala, 525 U.S. 449, 451 (1999); HCA Health Servs. of Okla. v. Shalala, 27 F.3d 614, 615 (D.C. Cir. 1994). Once three years has passed, the intermediary's determination is deemed "closed" and can no longer be reopened. See 42 C.F.R. § 405.1885(b); see also Regions Hospital v. Shalala, 522 U.S. 448, 455 (1998); HealthEast Bethesda Lutheran Hosp. and Rehabilitation Center v. Shalala, 164 F.3d 415, 417 (8th Cir. 1998). The three-year time limit is intended to balance the interests in finality of "intermediary determinations and the resulting amount of program payment" with the need to allow reasonable time for corrections. See Medicare Provider Reimbursement Manual, Part I, Pub. 15-1, § 2930, available athttp://www.cms.gov/Manuals/PBM/list.asp (last visited December 9, 2011).

B. Factual and Procedural History

Plaintiffs each operate a hospital complex consisting of a hospital and an affiliated physician clinic. See A.R., Vol. 1 at 104. In 1996, CMS (then known as the Administrator of the Health Care Financing Administration) and the PRRB determined that the residents rotating through the affiliated clinics of other Kaiser-owned hospitals would count toward their intern and resident FTE counts for a separate Medicare reimbursement called "indirect medical education" (IME). See Kaiser Found. Group-IME Costs v. Aetna Life Ins. Co., HCFA Adm'r Dec. (Oct. 21, 1996), reprinted in [1996-2 Transfer Binder] Medicare & Medicaid Guide (CCH) ¶ 44,980 (AR, Vol. 1, at 195-97); Kaiser Found. Group-IME Costs v. Aetna Life Ins. Co., PRRB Hr'g Dec. No. 96-D50 (Aug. 14, 1996), reprinted in [1996-2 Transfer Binder] Medicare & Medicaid Guide (CCH) ¶ 44,559 (AR, Vol. 1 at 199-204). Those hospitals' respective IME caps were increased accordingly at that time to include these residents. See A.R., Vol. 1 at 104.

Although IME is subject to the same FTE cap as GME, see 42 U.S.C. §§ 1395ww; see also Swedish American Hosp. v. Sebelius, 773 F. Supp. 2d 1, 3 (D.D.C. March 29, 2011), Plaintiffs' GME caps were not increased to reflect the affiliated clinics' 1996 residents and interns. See A.R., Vol. 1 at 104. Because of this, Plaintiffs contend -- and the intermediary agrees -- that their GME FTE caps are too low. See Joint Stipulation, A.R., Vol. 1 at 277-79 (January 29, 2009). Plaintiffs, however, did not appeal the FTE counts from their 1996 reports or the GME FTE cap established by their 1998 reports within the respective three-year limitations periods. Instead, the Hospitals finally sought to increase their GME FTE cap through a timely filed appeal of their 1999-2003 cost-reporting years. See A.R., Vol. 1 at 61-70. By raising their FTE cap, they could obtain greater reimbursement in subsequent years since rates are still pegged to the figure reported in 1998. Plaintiffs are not, it should be emphasized, seeking to revisit their actual reimbursement in closed years.

The intermediary denied Plaintiffs' appeal, finding it could not increase their GME FTE caps because the cost reports establishing the caps were no longer subject to reopening. See A.R., Vol. 1 at 107-111. The intermediary took the position that Plaintiffs' 1998 cost reports were the reports at issue because the GME FTE caps first appeared there (based on FTE counts in the 1996 reports). See A.R., Vol. 1 at 107. Because those reports were all closed, the intermediary concluded that ...


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