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University Medical Center, Inc v. Kathleen Sebelius

April 17, 2012


The opinion of the court was delivered by: John D. Bates United States District Judge


The Secretary of the Department of Health and Human Services is responsible for administering Medicare. Plaintiff is a teaching hospital in Louisville, Kentucky that seeks judicial review of the Secretary's denial of certain payments associated with services plaintiff provided to Medicare recipients in 1999. The requested payments are for the cost of training plaintiff's dental residents off-site at the University of Louisville's dental school.

According to HHS regulations, hospitals seeking payment for the cost of training residents off-site must have a written agreement with the off-site provider that the hospital will incur substantially all of the costs of that training. Plaintiff executed such an agreement with the University of Louisville on December 20, 1999. The agreement indicated that plaintiff would incur substantially all dental resident training costs retroactively to January 1, 1999. The Secretary determined, however, that the HHS regulations required written agreements between hospitals and off-site providers that are entered into prior to the occurrence of off-site training. The Secretary therefore denied plaintiff medical education payments for training costs from the beginning of the year until the execution of the agreement on December 20, 1999. Plaintiff now argues that the regulation cannot be interpreted to require written agreements entered into prior to the occurrence of off-site training and that the Secretary failed to provide adequate notice of that requirement. Plaintiff further argues that both the written agreement requirement itself and the requirement that written agreements be in place before off-site training occurs are inconsistent with the Medicare statute.

Now before the Court are the parties' cross-motions for summary judgment. For the reasons described below, the Court concludes that plaintiff received adequate notice of the requirement to enter into written agreements prior to the occurrence of off-site training time. The Court also concludes that interpreting the regulation to contain such a requirement was reasonable and that the requirement, as well as the underlying written agreement requirement, were consistent with the statute. Accordingly, the Secretary appropriately denied plaintiff's claims, and the Court will grant the Secretary's motion for summary judgment and deny plaintiff's motion.

I. Statutory and Regulatory Background

A. Medicare and Medical Education Payments

The Secretary of the Department of Health and Human Services, through the Centers for Medicare and Medicaid Services ("CMS" or "Administrator"), administers the Medicare statute, Title XVIII of the Social Security Act, 42 U.S.C. § 1395 et seq. The Medicare program is divided into several parts, of which Part A is relevant here. Part A covers "inpatient hospital services" furnished to Medicare beneficiaries by participating providers, such as hospitals. 42 U.S.C. § 1395d(a)(1). CMS itself is directly responsible for the costs of Part A services. Id. To coordinate billing by and payment to hospitals, Medicare contracts with fiscal intermediaries (usually private insurance companies) pursuant to 42 U.S.C. § 1395h.*fn1

Health care providers submit claims to fiscal intermediaries for services provided to Medicare Part A patients and these claims are paid over the course of the year. At year-end, hospitals file cost reports with the fiscal intermediaries, which reconcile interim payments made over the course of the year with actual reimbursements due. See 42 C.F.R. § 405.1803. The fiscal intermediary makes a final determination on payments due to providers, which is appealable to the Provider Reimbursement Review Board ("PRRB" or "Board"). 42 U.S.C. § 1395oo(a). The PRRB's decision is subject to further review by the CMS Administrator, and a provider may seek review of the Administrator's decision in federal district court. See 42 U.S.C. § 1395oo(f).

The Medicare program also pays teaching hospitals for certain costs related to graduate medical education. Medicare makes both an "indirect graduate medical education payment" ("IME") and a "direct graduate medical education payment" ("GME"). IME payments are intended to reimburse teaching hospitals providing services to Medicare beneficiaries for their higher-than-average operating costs. See 42 U.S.C. §§ 1395f(b), 1395ww(d). Medicare makes a payment for each Medicare beneficiary discharged by a hospital. See 42 U.S.C. §§ 1395ww(d), 1395w-21(i)(1). The per-discharge payment increases depending on the hospital's ratio of medical residents to beds - i.e., the higher the number of residents or the higher the number of discharges, the greater the IME payment. See 42 U.S.C. § 1395ww(d)(5)(B). The GME payment, on the other hand, is a payment intended to compensate teaching hospitals for the direct costs of graduate medical education incurred because of services provided to Medicare beneficiaries. 42 U.S.C. § 1395ww(h). The amount of the GME payment depends on the number of full-time residents and the Medicare "patient load." Hence, like the IME payment, the GME payment increases when the number of Medicare enrollees or the number of residents rises. See id. Both GME and IME payments, then, depend on the number of residents and the number of Medicare enrollees receiving services from a hospital.

B. Training in Non-Hospital Settings

Under revisions made to the Medicare statute in 1986, for the purpose of counting the number of residents a hospital includes in its GME payment calculation, hospitals may include residents training in non-hospital settings, such as a physician's office, clinic, or nursing home. See Omnibus Budget Reconciliation Act of 1986, Pub. L. No. 99-509, § 9314, 100 Stat. 1874 (codified at 42 U.S.C. §§ 1395ww(h)(4)(E)). Under the statute, the time residents spend in non-hospital settings is included if (1) their time is related to patient care and (2) the hospital incurs all or substantially all of the costs of their training in the non-hospital setting. Id. This statutory provision applied to resident training programs effective July 1, 1987. Id. In September 1989, the Secretary promulgated a regulation implementing this provision. See 54 Fed. Reg. 40,286, 40,288 (Sept. 29, 1989). In addition to the statutory requirements, the regulation imposed an additional requirement that, in order for hospitals to count resident training time at non-hospital sites, the hospital must have a written agreement with the non-hospital site establishing that the costs of the residents' training is to be paid by the hospital. See id. at 40,317 (codified at 42 C.F.R. § 413.86(f)(1)(iii)).

In 1997, Congress amended the Medicare statute to also include the time residents spend training in non-hospital settings in IME payment calculations, effective October 1, 1997. See Balanced Budget Act of 1997, Pub. L. No. 105-33, § 4621(b)(2), 111 Stat. 251 (codified at 42 U.S.C. § 1395ww(d)(5)(B)(iv)). HHS then promulgated a regulation implementing this revision, incorporating the same requirement for a written agreement between hospitals and non-hospital sites that had previously applied with respect to counting time in non-hospital settings for GME payments. See 62 Fed. Reg. 45,966, 46,003, 46,029 (Aug. 29, 1997) (codified at 42 C.F.R. § 412.105(f)(1)(ii)(C)).

In July 1998, the Secretary revised the regulation governing the counting of time residents spend training in non-hospital sites. See 63 Fed. Reg. 40,954, 40,986-98 (July 31, 1998). The regulation, as revised, now defined the statutory requirement that a hospital incur all or substantially all of the costs of off-site resident training. Id. at 41,005. In particular, the new definition required hospitals to incur "the portion of the cost of teaching physicians' salaries and fringe benefits attributable to direct graduate medical education," in addition to the residents' salaries and fringe benefits. Id. (emphasis added). The revised regulation accordingly expanded the requirements for the written agreement between hospitals and non-hospitals sites to ensure that the written agreement specified that the hospital would pay compensation for "supervisory teaching activities," in addition to resident salaries and benefits. See id. at 40,986-97, 41,004-05 (codified at 42 C.F.R. § 413.86(f)(4) and amending cross-reference in 42 C.F.R. § 412.105(f)(1)(ii)(C)); see also Administrative Record ("A.R.") at 229. The revised regulation was made effective for portions of cost reporting periods occurring on or after January 1, 1999. Id.*fn2 The primary question in this case is whether hospitals and non-hospital sites were required under the regulation to have written agreements already in place when off-site training occurred - that is, whether there was a requirement to have a "contemporaneous written agreement" entered into "prospectively" (before training occurred).

In addition to the regulation itself, the parties have focused on two contemporaneous statements from HHS about the written agreement requirement. First, the parties focus on an exchange between HHS and a commenter in the preamble accompanying the promulgation of the 1998 revision to the regulation. The preamble stated:

One commenter noted that some arrangements between hospitals and nonhospital settings for the training of residents predate the GME base year. This commenter stated that hospitals did not compensate nonhospital sites for supervisory teaching physician costs and it would not be fair to shift these costs to teaching hospitals. The commenter also stated that teaching hospitals have already entered into written agreements with nonhospital sites under the existing rules. According to the commenter, the proposed rule would necessitate renegotiation of thousands of agreements, imposing tremendous transaction costs upon the academic medical community. The commenter noted that if the agreements are not renegotiated prior to the effective date, the hospital will be unable to count the residents for direct and indirect GME, and this will have a lasting effect because of the 3 year averaging rules.

63 Fed. Reg. at 40,994-95. HHS responded:

The GME provisions of this final rule will be effective January 1, 1999. All other provisions of this final rule are effective October 1, 1998. By making a later effective date for the GME provisions, hospitals and nonhospital sites will have 5 months following publication of this final rule to negotiate agreements that will allow hospitals to continue counting residents training in nonhospital sites for indirect and direct GME. These agreements are related solely to financial arrangements for training in nonhospital sites. We do not believe that the agreements regarding these financial transactions will necessitate changes in the placement and training of residents.

Id. at 40,995. Second, the parties focus on a letter sent by the Administrator to the Association of American Medical Colleges ("AAMC") in February 1999. The letter first indicated that the Administrator was responding to the AAMC's request that the Administrator "delay the effective date of new criteria for graduate medical education (GME)." A.R. at 229. The letter then summarized the change in the regulation regarding written agreements. Id. The letter concluded:

We did not receive any comments [in the notice-and-comment process] requesting a postponement of the effective date. The provisions of the regulation other than GME were effective October 1, 1998. We specifically made the provisions affecting GME effective January 1, 1999 in order to provide hospitals and nonhospital sites with more time to make revisions to written agreements.

Based on concerns brought to our attention, we issued a Program Memorandum on November 20, 1998 (enclosed) that further details our policies with regard to Medicare payment for training in nonhospital sites. While the written agreements did not need to be sent to the fiscal intermediaries prior to January 1, 1999, they must cover the period beginning January 1, 1999, and be retained as supporting documentation for residents included in hospital indirect and direct GME counts for cost reports which end in 1999 and subsequent years.

Id. at 229-30. These statements are discussed in detail below.

II. Background and Prior Proceedings

A. Plaintiff's Case

Plaintiff is a not-for-profit corporation that does business as the University of Louisville Hospital, a teaching hospital in Louisville, Kentucky. A.R. at 26. Since 1996, plaintiff and the University of Louisville ("University") have been parties to an affiliation agreement, under which plaintiff serves as the principal teaching hospital of the University. Id. Pursuant to this agreement, plaintiff works with the University's dental school to train oral surgery and dental general practice residents in the dental school's graduate medical education programs. Id. In December 1999, plaintiff and the University signed an agreement regarding the costs of training dental residents, including the costs of dental resident compensation and supervisory teaching activities. Id. Although the agreement was executed (that is, all signatures were entered) on December 20, 1999, the agreement bore an earlier effective date of January 1, 1999. See id. at 26-27.

Plaintiff incurred all or substantially all of the costs of the dental residents' training during 1999 and the dental residents were engaged in ...

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